Informed trading, information uncertainty, and price momentum

► Trading strategies based on uncertainty work well when limited to high-PIN stocks. ► Stocks with low-PIN have no price momentum even their uncertainty level is high. ► Momentum returns exist for high-PIN stocks irrespective of information uncertainty. In this paper we investigate the effects of in...

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Bibliographic Details
Published in:Journal of banking & finance 2012-07, Vol.36 (7), p.2095-2109
Main Authors: Chen, Yifan, Zhao, Huainan
Format: Article
Language:English
Subjects:
Information
Information uncertainty
Informed trading
Price momentum
Prices
Rates of return
Securities trading
Stock exchange
Stock prices
Stocks
Studies
Traders
Uncertainty
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Summary:► Trading strategies based on uncertainty work well when limited to high-PIN stocks. ► Stocks with low-PIN have no price momentum even their uncertainty level is high. ► Momentum returns exist for high-PIN stocks irrespective of information uncertainty. In this paper we investigate the effects of informed trading (PIN) and information uncertainty in determining price momentum. We find that trading strategies based on buying high-uncertainty good-news stocks and shorting high-uncertainty bad-news stocks work well when limited to high-PIN stocks, while stocks with low-PIN do not exhibit price continuations, even when the uncertainty level of those stocks is high. In contrast, momentum returns are always significant for high-PIN stocks, irrespective of information uncertainty. Overall, we show that the informed trading effect is both independent of and stronger than that of information uncertainty in determining price momentum.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2012.03.016