INFORMATION ASYMMETRY EFFECTS ON LATIN AMERICAN STOCK MARKETS

We estimate the probability of informed transactions and their effects on daily and intraday returns in Latin America. Calculating the probability of dynamic informed trading (Easley, Engle, O'Hara, and Wu, 2008) on a daily basis, as a measure of the level of informed trades, we study whether this is related to trading volumes and market capitalization in Latin American stocks. Additionally, we test for a short-term relationship between the probability of informed trades and returns. The first study assessing the dynamics of asymmetric information in the region's stock markets evaluated 343 actions in the 6 largest Latin American markets. The results, consistent with market microstructure theory, show that there is an increased risk of asymmetric information in stocks with lower trading volumes and lower market capitalization, and that stock prices move in the direction of information, although some of this effect is reversed the next day.