Measuring information asymmetry in stock returns using information-augmented asset pricing models

Asset pricing models are utilized to navigate market signals and determine relevant factors that will explain the effect it has on an asset\u27s expected return. Our paper aims to identify if adding an information asymmetry factor in asset pricing models plays a significant role in determining expected stock returns. As such, we examine the effects of information asymmetry on information-sorted excess portfolio returns in the Philippine Stock Exchange from July 2009 to June 2019. This study extends the CAPM, the Fama and French three-factor and five-factor models by adding risk factors for information asymmetry. We use three alternative proxy variables to represent information asymmetry: bid-ask spread, number of transactions, and idiosyncratic volatility. We find an information premium in the PSE where portfolios of high information asymmetry stocks outperform portfolios of low information asymmetry stocks. We conclude that the market prices information risk, where information risk positively affects excess portfolio returns. Our study leads investors/traders to consider an information-based investing/trading strategy in their portfolio construction