A Simple Multimarket Measure of Information Asymmetry

We develop and implement a new measure of information asymmetry among traders. Our measure is based on the intuition that informed traders are more likely than uninformed traders to generate abnormal volume in options or stock markets. We formalize this intuition theoretically and compute the resulting multimarket information asymmetry measure (MIA) for firm-days as a function of unsigned volume totals and without estimating a structural model. Empirically, MIA has many desirable properties: it is positively correlated with spreads, price impact, and absolute order imbalances; predicts future volatility; is an effective conditioning variable for trading strategies stemming from price pressure; and detects exogenous shocks to information asymmetry.

This paper was accepted by Lauren Cohen, finance.