Measuring Information Asymmetry in Event Time

Abstract

I describe the importance of using event time in measure information asymmetry in U.S. equity markets. Information asymmetry between market participants represents a risk that is compensated by a higher expected return for both short-term traders and long-term investors. Firms with greater information asymmetry have higher expected returns and lower prices while firms with lower information asymmetry have lower expected returns and higher prices. A long/short trading strategy built on these results produces abnormal returns of 11.45% per year.