The Relative Dispersion Variation and Asymmetric Information
In this study, we introduce a new gauge of information asymmetry called the Relative Dispersion Variation (RDV). By calculating the ratio of the deviation of return to the deviation of trading volume, RDV provides a simple yet effective way to assess the level of information asymmetry in security markets. Building upon the inefficient market model proposed by Grossman and Stiglitz (1980) that addresses information cost, we demonstrate that RDV is positively correlated with the proportion of informed trade. Empirically, we calculate RDV using daily data on returns and trading volume, and our findings strongly support the hypothesis that RDV is indicative of information asymmetry. We examine various factors such as return reversals, institutional ownership, and firm-specific measures of asymmetric information in Chinese stocks. Furthermore, we establish the importance of RDV in factor asset pricing. By constructing the UMI factor using RDV, we confirm that UMI significantly improves the asset pricing performance of popular models such as CAPM, Fama & French (1993) (FF3), and Fama & French (2015) (FF5).