Impacts of Private Information on the Risk Premium - An Empirical Study on TSEC-OTC listed Companies in Taiwan

• Main Authors: Jun-Jie Huang, 黃俊傑
• Other Authors: Yang-Cheng Lu
• Format: Others
• Language: zh-TW
• Published: 2003
• Online Access: http://ndltd.ncl.edu.tw/handle/96849045031993279309

碩士 === 銘傳大學 === 財務金融學系碩士班 === 91 === In terms of financial theory, information trading is based on the predictability of the difference between market value and fundamental value. However, few of investors or practitioners can identify the noise resulting from the deviation of market price from fundamental price. This paper gives an empirical study on the role of information-based trading in affecting stock price; moreover the relevant application of investing strategy will be suggested. The testing sample data are OTC-TSEC listed companies over time period from 1994 to 2002. We use the standard Fama-Macbeth procedure to deal with the regression of cross-sectional monthly excess-returns on firm size (Size), the ratio of book to market value (B/M) and probability information trading (PIN) ( Easley, Hvidkjaer and O’Hara, 2002). The higher PIN is a stock, the less public is its information. Empirically, the PIN of individual stock of OTC-TSEC listed companies is below 0.5 on average. However, the PIN shows no information content in the four-factor cross-sectional regression. Nevertheless, we find that top quarter performers (small-value stock with high PIN) will stay among top-performing groups in the consecutive months. It shows that the profitability of information trading will disappear immediately on average within weeks. At last, we suggest an investing portfolio built up by PIN-B/M-Size sorting basis in the momentum life cycle. It supports that the early-stage portfolio with long position of small-value stocks with high PIN and short one of large-glamour stock with low-PIN is most profitable. In other words, an investor can earn rich profit by buying small value stock before the firm-specific information is completely in public.