文档介绍：August 28, 1997
MARKET MICR OSTR UCTURE AND ASSET PRICING:
ON PENSA TION F OR AD VERSE SELECTION IN
STOCK RETURNS
Mic hael J. Brennan and Av anidhar Subrahman y am
Irwin and Goldyne Hearsh Professor of Banking and Finance, Anderson Graduate Sc ho ol
of Managemen t, Univ ersit y of California at Los Angeles, and Professor, London Business
Sc ho ol.
Asso ciate Professor, Graduate Sc ho ol of Business, Colum bia Univ ersit y; and Acting
Asso ciate Professor of Finance, Anderson Graduate Sc ho ol of Managemen t, Univ ersit y
of California at Los Angeles.
W e are grateful to Y ak o v Amih ud and Eugene F ama for men ts, and to Jim
Brandon for his advice and assistance.
Abstract
MARKET MICR OSTR UCTURE AND ASSET PRICING:
ON PENSA TION F OR AD VERSE SELECTION IN
STOCK RETURNS
Mo dels of price formation in securities mark ets suggest that priv ately informed in-
v estors create signi can t adv erse selection costs for uninformed in v estors. This implies
that rational uninformed in v estors will demand higher rates of return on securities for
whic h informational asymmetries are more sev ere. In this pap er, w e deriv e a simple
relation bet w een exp ected sto c k returns and mark et illiquidit y caused b y information
asymmetry , in a mo del with a single represen tativ e in v estor. Using CRSP data for the
p erio d 1984-1991, and ISSM in trada y data for the y ears 1984 and 1988, w e in v estigate
the empirical relation bet w een sto c k returns and measures of illiquidit y . W e nd a sig-
ni can t relation bet w een required rates of return and our measures of illiquidit y after
adjusting for the F ama-F renc h risk factors related to the o v erall mark et, rm size, and
the b o ok-to-mark et ratio, and also after accoun ting for the e ects of the quoted bid-ask
spread.
In tro duction
In the asymmetric information paradigm whic h has b een the cen tral fo cus of the mark et
microstructure literature in recen t