The Pricing of Earnings in the Presence of Informed Trades: A Simple GMM Approach

62 Pages Posted: 27 Mar 2020

See all articles by Murugappa (Murgie) Krishnan

Murugappa (Murgie) Krishnan

Yeshiva University

Srinivasan Rangan

affiliation not provided to SSRN

Nikhil Vidhani

Indian Institute of Management (IIMB), Bangalore

Date Written: March 24, 2020

Abstract

We build a Kyle-type pricing model with earnings and trading signals and estimate its deep parameters - the information advantages of traders and firms, the correlation between the firm and traders’ information, and the noise variance. Moment conditions derived from the pricing rule yield a simpler form than in prior work, and we validate our model both asymptotically and in a finite sample. For our sample from Indian markets, we find that traders know more about firm payoffs than firms themselves. For many firms, the market’s weight on unexpected earnings is negative, causing good news to be bad news.

Keywords: Foreign Institutional Investors, GMM, Institutional Trading, Kyle Model, Earnings Announcements

Suggested Citation

Krishnan, Murugappa (Murgie) and Rangan, Srinivasan and Vidhani, Nikhil, The Pricing of Earnings in the Presence of Informed Trades: A Simple GMM Approach (March 24, 2020). IIM Bangalore Research Paper No. 607, Available at SSRN: https://ssrn.com/abstract=3560147 or http://dx.doi.org/10.2139/ssrn.3560147

Murugappa (Murgie) Krishnan (Contact Author)

Yeshiva University ( email )

500 West 185th Street
New York, NY 10033
United States

Srinivasan Rangan

affiliation not provided to SSRN

Nikhil Vidhani

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India
7975557296 (Phone)

HOME PAGE: http://sites.google.com/view/nikhilvidhani

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