Essays on Information Diffusion and Adverse Selection

The first essay is the result of work with Paul Borochin. We perform the first large-sample estimation of the Volume Synchronized Probability of Informed Trading (VPIN) measure on the NYSE TAQ universe, enabling us to test the validity of VPIN with high statistical power and to do traditional asset pricing tests of informed trading. Informed trading measured by VPIN is priced, and is not explained by firm characteristics such as volume, volatility, or liquidity, supporting the validity of the measure. Additionally, we create a novel signed version of VPIN (SVPIN) to identify the direction of informed trades. A portfolio long low-VPIN stocks and short high-VPIN ones delivers a monthly five-factor alpha of .18%, which rises to .29% when using SVPIN. A trading strategy following the SVPIN factor delivers an annualized five-factor BHAR of 11.45%. We further document a reversal in stock performance in portfolio sorts on SVPIN, the incorporation of which into a trading strategy improves performance to an annualized BHAR of 17.34%. The second essay is a sole authored paper that explores whether information asymmetry in equity markets is a determinant of information diffusion from currency markets. It provides evidence that price delay attributed to currency information is different than price delay attributed to the market risk premium. Furthermore, information asymmetry is a determinant of price delay and price delay attributed to currency information produces abnormal returns of 6.32% per year. The third essay is another joint project with Paul Borochin. We create and test two novel network-based measures of interconnectedness in the financial industry during 1996 to 2013. A network based on informed trading in financial firms predicts firm-specific risk and performance, while one formed on financial firm returns predicts future macroeconomic risk. A trading strategy based on informed trading network centrality in the financial sector delivers an annualized four-factor CAR of 7.73%