Information flow and pricing errors: A unified approach to estimation and testing

This study examines whether rates of information flow differ between tradin g and non-trading periods, and whether the variances of pricing errors diff er at the open and close of trading. The approach improves on existing meth ods by allowing for correlation between pricing errors and information flow , and by conducting inferences at the individual security level. The daytim e rate of information flow is about seven times the overnight rate, and the variances of pricing errors at the open are not different from those at th e close of trading. This evidence differs from existing results based on re turn variance ratios.