Three essays on information risk
Qian, Xiao Lin
Date of Issue2010
College of Business (Nanyang Business School)
This dissertation contains three essays. The first essay develops an information risk measure that is based on the price discovery of large trades. This is motivated by the observation that informed traders prefer to trade in large size, so the price discovery of large trades would yield a more precise measure of the information risk than would price discovery of small trades. As the price series of large trades and small trades are cointegrated, the price discovery of trades can be estimated via the vector error-correction model (VECM). Intuitively, we use VECM to study how a temporary gap between the large trade price and the small trade price of the same stock is going to be closed. If closing the gap is mostly done through the small trade price with little movement in the large trade price, the large trade price has been closer to the long-run equilibrium price, and the large trade price has a greater price discovery function for this stock. Using this new measure, we show that information risk is priced. The pricing impact of information risk is not a manifestation of liquidity effect as some have argued for the case of PIN. Moreover, it subsumes the pricing impact of both PIN and Amihud’s (2002) ILLIQ.