Measuring Private Information Trading in Emerging Markets

We examine the dynamic relation between return and volume of individual stocks in Russia and other emerging markets. In a simple model in which investors trade to share risk or speculate on private information, Llorente, Michaely, Saar, and Wang (2001) show that returns generated by risk-sharing trades tend to reverse themselves while returns generated by private information trades tend to continue themselves. We apply this theoretical framework to analyze the relation between daily volume and first-order return autocorrelation for individual stocks traded in Russia and other emerging markets. We find strong evidence of return continuation following high volume days, suggesting the presence of private information trading in emerging markets. Using corporate announcement data from Russia, we discover that the private information trading is especially strong around major corporate event dates. In addition, we find stocks in countries that enforce insider-trading law and provide better investor protection exhibit less private information trading. These results suggest a possible measure of "information asymmetry" for ranking emerging market stocks.