Information Asymmetry, Trade Size, and the Dynamic Volume‐Return Relation: Evidence from the Australian Securities Exchange

Date01 August 2014
Published date01 August 2014
The Financial Review 49 (2014) 539–564
Information Asymmetry, Trade Size, and
the Dynamic Volume-Return Relation:
Evidence from the Australian Securities
Yan g Su n
University of South Australia
Huu Nhan Duong
Monash University
Harminder Singh
Deakin University
This paper investigates the influence of information asymmetry on the cross-sectional
variation of volume-return relation. We find that the dynamic volume-return relation within
medium-size trades has the most significant response to the degree of information asymmetry.
Correspondingauthor: Department of Banking and Finance, Faculty of Business and Economics, Monash
University, 900 Dandenong Road, Caulfield East, 3145, Australia; Phone: +61 3 9903 2032; Fax:+61 3
9903 2422; E-mail:
We gratefully acknowledge helpful comments from Bonnie F. Van Ness and Robert A. Van Ness (the
editors), and an anonymous referee. We thank Michael Chng, Charles J. Corrado, Saikat Sovan Deb,
Kingsley Fong, Henry Leung, and seminar and conference participants at Deakin University, RMIT
University,Indian School of Business – Hyderabad, Indian Institute of Management – Bangalore, GNIM –
Delhi, the 2011 Finance and Corporate Governance Conference, the 19th Conference on the Theories and
Practices of Securities and Financial Markets, and the 19th Annual Conference on Pacific Basin Finance,
Economics, Accounting, and Management for helpful comments and suggestions. We are grateful to the
Securities Industry Research Centre of Asia-Pacific (SIRCA) for providing the data used in our study.All
remaining errors are our own.
C2014 The Eastern Finance Association 539
540 Y. Sun et al./The Financial Review49 (2014) 539–564
Wealso show that the effect of information asymmetry on the volume-return dynamics migrates
to small-size trades in recent years, especially in larger stocks. These results are consistent
with the notion that informed traders prefer medium-size trades and this preference has shifted
to small-size trades. Our findings highlight the importance of incorporating informed traders’
trade-size decision in the examination of the dynamic volume-return relation.
Keywords: trade size, information asymmetry, volume-return relation
JEL Classifications: G10, G20, G24
1. Introduction
Trading volume contains information about future price behavior and a consid-
erable amount of literature investigates the effectof trading volume on return autocor-
relation (Morse, 1980; Gallant, Rossi and Tauchen, 1992; Campbell, Grossman and
Wang, 1993; Conrad, Hameed and Niden, 1994; Stickel and Verrecchia, 1994; Lee
and Swaminathan, 2000). However, prior studies provide contrasting results on the
volume-return relation at the aggregate market index level and the individual stock
level (Llorente, Michaely,Saar and Wang, 2002). In this paper, we examine the influ-
ence of information asymmetry on the cross-sectional variation in the volume-return
relation of individual stocks. More specifically, we test the prediction of Llorente,
Michaely, Saar and Wang (2002) that stocks that are associated with a high (low)
degree of information asymmetry exhibit more return continuation (return reversal)
on high-volume days.
Our study contributes to the current literature by incorporating informed traders’
trade-size decision into the analysis of dynamic volume-return relation. Specifically,
we separate trading volume according to the size of the trade and investigate under
which trade-size group the volume-return dynamics have the greatest reaction to the
extent of information asymmetry. We are inspired by the line of research highlighting
that informed traders may prefer trades of a certain size (Easley and O’Hara, 1987;
Barclay and Warner, 1993; Chakravarty, 2001; Alexander and Peterson, 2007; Blau,
Van Ness and Van Ness, 2009). Under the joint hypothesis that informed traders’
trade-size preference defines the degree of information content in different trade-
size groups, and the degree of information asymmetry is associated with the cross-
sectional variation of volume-return relation, we argue that the dynamic volume-
return relation within the size category where informed traders concentrate should
have the most significant response to the degree of information asymmetry. To the
best of our knowledge, this is the first study that highlights the importance of the
informational role of trade size in the analysis of the dynamic volume-return relation.
In addition, we extend the prior literature by examining the evolution of in-
formed traders’ trade-size preference and its effect on the relation between informa-
tion asymmetry and the volume-return dynamics. The modern algorithmic trading

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