Can Traders Beat the Market? Evidence from Insider Trades

China Finance Review International (Forthcoming).

Posted: 18 Mar 2010 Last revised: 3 Jul 2014

See all articles by Qin Lei

Qin Lei

University of Michigan at Ann Arbor

Murli Rajan

University of Scranton

Xuewu Wesley Wang

Quinnipiac University

Date Written: December 8, 2010

Abstract

Using the comprehensive trading data for the U.S. corporate insiders between 1993 and 2008, we document robust evidence that insiders as a whole achieve transaction prices superior to the volume-weighted average prices. This outperformance, expressed as a positive trading alpha, remains after we control for trade difficulty, insider reputation and the corporate role ranks of insiders. Upon analyzing the time series patterns of portfolio returns to strategies of mimicking corporate insiders with abnormal trading alphas in the extreme quartiles, we conclude that the outperforming insiders at the aggregate level resemble value investors who act on long-term fundamental information, trade patiently and earn rents from providing liquidity. Moreover, outside investors benefit from mimicking the acts of outperforming insiders in real time. The sizeable profit from this mimicking strategy withstands the erosion from adjustments for standard factors in the asset pricing literature and the adjustment for stock characteristics.

Keywords: Insider Trading, VWAP, Transaction Costs, Trading Alpha, Investment Style

JEL Classification: G10, G14

Suggested Citation

Lei, Qin and Rajan, Murli and Wang, Xuewu Wesley, Can Traders Beat the Market? Evidence from Insider Trades (December 8, 2010). China Finance Review International (Forthcoming).. Available at SSRN: https://ssrn.com/abstract=1572739 or http://dx.doi.org/10.2139/ssrn.1572739

Qin Lei (Contact Author)

University of Michigan at Ann Arbor ( email )

Ross School of Business
701 Tappan Street
Ann Arbor, MI 48109-1234
United States

HOME PAGE: http://leiq.bus.umich.edu

Murli Rajan

University of Scranton ( email )

Bethlehem, PA 18015-3118
United States

Xuewu Wesley Wang

Quinnipiac University ( email )

275 Mt Carmel Ave
Hamden, CT 06518
United States
6179353977 (Phone)

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