Is Information Risk Really a Determinant of Security Returns? Evidence from TORQ

Using a sample of NYSE securities, we investigate whether there is an information risk premium in securities return. We use two proxies for information, probability of information trading (PIN) and institutional trading and determine how those impact securities return after controlling for other known risk factors. We use intraday transactions data from TORQ to compute PIN denoting information content in trades from the maximum likelihood estimates of the parameters of a mixture model. Our main finding is that only beta and volatility denoted by price inverse and standard deviation of returns respectively are the primary determinants of security returns, but PIN and institutional trading, proxies for information risk are not priced in security returns. Beta and volatility are derived from market prices and hence fall under price risk. Turnover, a likely proxy for both liquidity and price risk is also a significant determinant of return. Contrary to the findings of Easley et al. (2002), our results show that information risk is not a significant determinant of security return