Information Flows and Systematic Risk
Society for Financial Studies Cavalcade
39 Pages Posted: 8 Jul 2021
Date Written: May 25, 2020
The arrival of new information is a source of systematic risk for the holder of a financial security. Using several measures of information flows, we show that a stock’s sensitivity to market-wide information flow is associated with a robust cross-sectional return premium that is distinct from other return premia. We find that the amount of information impounded in prices through trading has increased in recent years consistent with declining trading costs and the rise of algorithmic trading. Consequently, the information flows risk premium is increasing through time.
Keywords: information flows, asset pricing, return premium, systematic risk
JEL Classification: G14
Suggested Citation: Suggested Citation