TY - JOUR
T1 - Information based trade, the PIN variable, and portfolio style differences
T2 - Evidence from Tokyo stock exchange firms
AU - Kubota, Keiichi
AU - Takehara, Hitoshi
N1 - Funding Information:
The authors acknowledge financial support from the Grant-in-Aid for Scientific Research from the Ministry of Education, Culture, Sports, Science and Technology of Japan. We appreciate our paper receiving the Pacific Basin Finance Journal Research Excellence Award during the presentation at the 2007 Asian Finance Association/Financial Management Association Conference in Hong Kong. The paper was also presented at the 2007 Econometric Society European Meeting and the 2004 Nippon Finance Association Annual Meeting, and at finance seminars at the University of California, Berkeley, the University of Texas, Austin, Kyoto University, and Nikkei Quick Co. Ltd. The authors thank Hung Wan Kot, Christine Parlour, Sheridan Titman, Jun Uno, Robert Wessels, James Wilcox, and Hong Yan for their helpful comments. The authors thank Thierry Foucault, Tetsuji Mikami, and Maureen O'Hara for helpful discussions.
PY - 2009/6
Y1 - 2009/6
N2 - We investigate whether the variables related to information based trade proposed by Easley et al. [Easley, D., Kiefer, N.M., O'Hara, M., Paperman, J.B., 1996. Liquidity, information, and infrequently traded stocks. Journal of Finance 51, 1405-1436.] help explain the daily price discovery process in an electronically order-driven market of the Tokyo Stock Exchange using the microstructure tick data. We find strong evidence that the value firms show higher probability of bad news occurrences than the growth firms. We also find that the PIN is higher for smaller firms as is the case in the U.S. With the portfolio ranking tests and the Fama and MacBeth test we find that the alpha variable, which represents the information event occurrence rate, is systematically related to required returns, while the evidence related to the PIN is weaker. In the final Fama and MacBeth test, in which the PIN or alpha variable is used as an additional explanatory variable to the benchmark Fama and French three factor model, we find that the sign of the alpha variable supports our hypothesis that the arrival of new information reduces the risk of the stock, though not significantly. We also find that the higher PIN value increases the risk of the stock, at the same time it can marginally improve the explanatory power of the multifactor model. We conclude that the PIN variable cannot be a substitutable proxy variable for the book-to-market factor unlike in the U.S., and that it is strongly related to the size variable.
AB - We investigate whether the variables related to information based trade proposed by Easley et al. [Easley, D., Kiefer, N.M., O'Hara, M., Paperman, J.B., 1996. Liquidity, information, and infrequently traded stocks. Journal of Finance 51, 1405-1436.] help explain the daily price discovery process in an electronically order-driven market of the Tokyo Stock Exchange using the microstructure tick data. We find strong evidence that the value firms show higher probability of bad news occurrences than the growth firms. We also find that the PIN is higher for smaller firms as is the case in the U.S. With the portfolio ranking tests and the Fama and MacBeth test we find that the alpha variable, which represents the information event occurrence rate, is systematically related to required returns, while the evidence related to the PIN is weaker. In the final Fama and MacBeth test, in which the PIN or alpha variable is used as an additional explanatory variable to the benchmark Fama and French three factor model, we find that the sign of the alpha variable supports our hypothesis that the arrival of new information reduces the risk of the stock, though not significantly. We also find that the higher PIN value increases the risk of the stock, at the same time it can marginally improve the explanatory power of the multifactor model. We conclude that the PIN variable cannot be a substitutable proxy variable for the book-to-market factor unlike in the U.S., and that it is strongly related to the size variable.
KW - Asymmetric information
KW - Information based trade
KW - Market microstructure
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U2 - 10.1016/j.pacfin.2008.06.001
DO - 10.1016/j.pacfin.2008.06.001
M3 - Article
AN - SCOPUS:61849084613
SN - 0927-538X
VL - 17
SP - 319
EP - 337
JO - Pacific Basin Finance Journal
JF - Pacific Basin Finance Journal
IS - 3
ER -