Asset Pricing and Probability of Information-based Trading: Application to the Tunisian Stock Market

In this paper we examine the influence of private information on Asset Pricing. The main obstacle that we face when we use CAPM with private information is the unavailability of the observable variables that directly measure private information. Microstructure literature provides many models to estimate it. An important contribution in this way was moved forward by Easley, Kiefer, O'Hara and Paperman (1996). They estimate private information by probability of information-based trading (PIN). Our study concerns a sample of 40 quoted securities in Tunisian financial market, over the period going from January 02, 2010 until December 31, 2014, and results appear conclusive. Firstly, we show the existence of asset pricing bias compared to the standard CAPM. Secondly, we find a strong relation between private information (PIN), spread, buyer and seller trades returns. This is consistent with the idea of PIN capturing the probability of informed trading. Finally, the validity of PIN as measure of private information, gave us a motivation to test the validity of CAPM with private information cost based on Probability of Information-based Trading.