Sahn-Wook Huh

An Analysis of the Amihud Illiquidity Premium

This paper analyzes the Amihud (2002) measure of illiquidity and its role in asset pricing. It is shown first that the effect of illiquidity on asset pricing is clarified by using the turnover version of the Amihud measure and including firm size as a separate variable. When we decompose the Amihud measure into elements that correspond to positive (up) and negative (down) return days, we find that in general, only the down-day element commands a return premium. Further analysis of the up- and down-day elements using order flows shows that a sidedness variable, which captures the tendency for orders to cluster on the sell side on down days, is associated with a more significant return premium than the other components of the Amihud measure.

Asymmetric Effects of Informed Trading on the Cost of Equity Capital

We decompose PIN, the probability of informed trading, into good-news (PIN_G) and bad-news (PIN_B) components, which we estimate at a quarterly frequency. We first assess the validity of PIN as a measure of informed trading by calculating its association with measures of the adverse-selection component of the cost of trading. We then provide new evidence that PIN_G and PIN_B capture informed trading around earnings announcements by showing that they predict positive and negative earnings surprises, respectively. Conjecturing that investors who take long positions will be more concerned about informed selling than about informed buying since the former depresses the sale price whereas the latter raises it, we then investigate asymmetry in the pricing of private information. We find strong evidence of such asymmetry in that the effect of PIN_B on the cost of equity capital is large and highly significant, whereas the effect of PIN_G is small and statistically insignificant.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2250 . This paper was accepted by Neng Wang, finance .

Price Impact and Asset Pricing

Using intradaily order flows processed via the Lee and Ready (1991) algorithm for NYSE/AMEX-listed stocks over the past 27 years, I estimate a set of price-impact parameters. The results provide strong evidence that price impact is priced in the cross-section of stock returns, even after controlling for risk factors, firm characteristics, and other low-frequency-based illiquidity proxies prevalent in the literature. While the Amihud (2002) measure is the best proxy of its kind, no low-frequency-based proxies can parallel the price-impact parameters. This suggests that price impact as a measure of illiquidity can be estimated more precisely by intradaily order flows, because it incorporates incremental information that comes out of high-frequency data. Therefore, price impact does a better job in capturing the return premium for illiquidity.

High-Frequency Measures of Informed Trading and Corporate Announcements

We explore the dynamics of informed trading around corporate announcements of merger bids, dividend initiations, SEOs, and quarterly earnings by calculating daily posterior probabilities of informed buying and selling. We find evidence of informed trading before the announcements and a significant part of the news in announcements is impounded in stock prices before the announcements by pre-event informed trading. We also find evidence of informed trading after the announcements. Most strikingly, the probability of informed trading after merger bids predicts the probability of the bid being withdrawn or met with a competing bid. For other announcements, post-announcement informed-trading probabilities predict subsequent returns. Received September 26, 2016; editorial decision December 17, 2017 by Editor Andrew Karolyi.

The Noninformation Cost of Trading and Its Relative Importance in Asset Pricing

We show that the noninformation component of trading costs is priced in the cross-section of stock returns using intraday data for NYSE/AMEX stocks. More importantly, we show that the noninformation component is much larger and more strongly related to stock returns than is the adverse-selection component, indicating that the noninformation component plays a more important role in asset pricing than does the adverse-section component. We conduct a variety of robustness tests and show that our main results hold for different estimation methods, measures of the adverse-selection cost, subsample periods, and control variables. We offer plausible explanations for these results.

Technology Competition and Informed Trading: Evidence from Weekly Patent Announcements

Using newly developed informed trading measures as well as updated patent-related data, we provide evidence that informed trading increases in the quarter during which firms are granted more, better-quality, and higher-valued patents. Patent news also predicts informed trading up to two quarters ahead, suggesting that it takes time for the stock market to fully reflect such information. Our results are robust to a series of tests. We find that the trading behavior of transient institutional investors is the main driver of the relations. In addition, we provide evidence that investors interpret patent-related news to a focal firm as bad news to its rival firms and trade their shares accordingly. But the cross-firm effects occur only in the current period.Using newly developed informed trading measures as well as updated patent-related data, we provide evidence that informed trading increases in the quarter during which firms are granted more, better-quality, and higher-valued patents. Patent news also predicts informed trading up to two quarters ahead, suggesting that it takes time for the stock market to fully reflect such information. Our results are robust to a series of tests. We find that the trading behavior of transient institutional investors is the main driver of the relations. In addition, we provide evidence that investors interpret patent-related news to a focal firm as bad news to its rival firms and trade their shares accordingly. But the cross-firm effects occur only in the current period. JEL Classification: G14, G12, O31