Survey on Information Risk using Microstructure Models

Classic asset pricing models assume that distribution of information is symmetric and suppose similar trade-off between risk and return among investors. In terms of information asymmetry that some traders have private information، investors will be faced with information risk; this is the risk of trading with informed traders. Easley et al. (2002) introduced probability of information based trade (PIN) as information risk measurement and developed a microstructure model for estimating PIN. This paper examines information risk pricing in Tehran Stock Exchange to see whether PIN can explain stock return in TSE. In the other hand we investigate relationship between firm size and probability of information based trade (PIN). Our results show that probability of information based trade (indicator of information risk) can explain stock return. A10 percent increase in PIN leads to 2. 8 percent increase in stock return. Also negative relationship found between firm size and probability of information based trade (PIN).