The Investigation of Information Risk Pricing; Evidence from Adjusted Probability of Informed Trading Measure

Information asymmetry is one of the most important uncertainties that investors are faced with. Empirical evidence states that information asymmetry is undiversifiable; hence, it’s expected to be priced and have an effect on the expected rate of return. The probability of informed trading (PIN) is the most popular indicator of information risk. This study aims to examine the pricing of information risk and its origin, for the first time, through dividing PIN into two sections of adjusted probability of informed trading (AdjPIN) and probability of symmetric order shocks (PSOS). For this purpose, the relationship between stock return and PIN components was examined through Fama-MacBeth regression (1973) in a sample of 43 companies listed on Tehran Stock Exchange from 2009 to 2015. The results stated that the adjusted probability of informed trading is priced; however, the probability of symmetric order shocks did not have a statistically significant effect. The same results were also obtained after volume changing through earning announcement periods.