Information Flows and Asset Pricing

The arrival of new information that changes the value of a security is a source of risk. We show that in the cross-section, a stock’s sensitivity to flows of market-wide information is an important source of risk that is associated with a robust return premium that is distinct from other return premiums. Using market microstructure measures, we find that in recent years an increasing amount of information is impounded in prices through trading, coinciding with declining trading costs and the rise of algorithmic trading. Consequently, the information flows factor is able to explain an increasing fraction of cross-sectional return premiums through time.