Measuring Informational Advantage of A Group of Investors

Abstract

This study interprets various theories of volume of stock markets in a unified DOint of view and classifies the theories into 4 categories: risk premium theory, adverse selection theory, privately informed trading theory, and market stabilization theory. Risk premium theory and adverse selection theory predict that net buying amount of an uninformed trader and future stock return have negative correlation and that ttle correlation approaches-I as current return volatility increases. Privately informed trading theory and market stabilization theory predict that net buying amount of an Informed trader and future stock return have posltive correlation and that the correlation approaches 1 as current return volatility increases. Utilizing these two predictions. this study suggests a method of measuring informational advantage of a group of investors. To measure degrees of Informational advantage of some investor groups in Korean stock market. the method is applied to 7 groups of investors: foreign investors, individual investors. institutional investors, securities companies, Insurers. ITCs, and banks. The result shows that ITCs have the highest degree of informational advant~ age while Individual investors have the lowest level of informational advantage. The fact that this result is consistent with prior researches means that the method suggested in this study has enough empirical validity. This method may be used in a performance evaluation process for a specific fund or a portfolio manager.