Informational Asymmetry between Institutional and Individual Traders: Evidence from Tehran Stock Exchange

Abstract

Informational asymmetry between institutional and individual traders is one of the widely examined issues in financial markets. The preference of each of these groups to attain personal information may provide other traders with important information. Novice traders, seeking opportunities for profit, can benefit by aligning themselves with the more informed group and monitoring their trading activities.This study aims to determine the winner group at attaining more personal information, by breaking down the probability of informed trading (PIN), a widely accepted metric for assessing informational risk, into two main components: the probability of informed trading of individuals (DPIN) and the probability of informed trading of institutions (SPIN). Moreover, the relation between these two components and the stock return has been tested using Fama-MacBeth two-step regression (1973). Our research draws on data from 35 companies listed on the Tehran Stock Exchange and Iran's Fara-Bourse, spanning 19 seasons, from December 2015 to October 2020. Our findings challenge previous studies, revealing that institutional traders possess a distinct informational advantage over individual traders. Furthermore, our findings show that the effect of DPIN and SPIN on stock return is not statistically significant.

Keywords

• institutional investors
• individual investors
• dpin
• spin
• informational inequality