We develop an information risk measure that is based on the price discovery of large trades, estimated via the vector error‐correction model. The measure is built on the observations that informed traders prefer to trade in large size and that prices of large trades and small trades are co‐integrated. Using this new measure, we show that information risk is priced. Furthermore, the pricing impact of this information risk measure subsumes the impacts of both PIN and Amihud’s ILLIQ. The latter result not only demonstrates the superiority of our information risk measure, it also suggests that the liquidity effect captured by ILLIQ has its origin in the asymmetric information.
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