Information Asymmetry, Liquidity and the Dynamic Volume-Return Relation in Panel Data Analysis

In the paper we investigate the dynamic relation between returns and volume of individual stocks traded on the Warsaw Stock Exchange. Theoretical models, such as the one proposed by Wang (J Polit Econ 102(1):127–167, 1994) suggest that this relation reveals the information asymmetry in the market and the role of private information. According to the models, the trade generated by risk-sharing and public information tends to decrease autocorrelation of returns, while the trade generated by private information has the opposite effect. To test this empirically we compared the coefficients obtained from the return-volume relation with other approximations of information asymmetry, based on liquidity. Unlike other works we have used dynamic regression to obtain the coefficients for 52 stocks, assuming that coefficients for individual stock can vary from month to month. Then we used panel regression with random effects to test the relationship between coefficient of information asymmetry and liquidity. We find an evidence supporting the compliance of measure of information asymmetry, especially for medium and small capitalization companies.