Informed Trading and Price Discovery before Corporate Events
63 Pages Posted: 3 Jul 2013 Last revised: 19 Aug 2016
Date Written: June 27, 2016
Abstract
Stock prices incorporate less “news” before negative events than positive events. Further, we find evidence that informed agents use less price aggressive (limit) orders before negative events and more price aggressive (market) orders before positive events ("buy-sell asymmetry"). Motivated by these patterns, we model the execution risk that informed agents impose on each other and relate the asymmetry to costly short selling. When investor base is narrow, security borrowing is difficult, or the magnitude of the event is small, buy-sell asymmetry is pronounced and price discovery before negative events is lower. Overall, informed agents' strategies influence the process of price formation in financial markets, as predicted by theory.
Keywords: Informed trader; insider trading; trading strategy; short sale; buy-sell asymmetry
JEL Classification: G11, G12, G14, G18
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Hidden Liquidity: An Analysis of Order Exposure Strategies in Electronic Stock Markets
By Hendrik Bessembinder, Marios A. Panayides, ...
-
The Impact of Iceberg Orders in Limit Order Books
By Stefan Frey and Patrik Sandås
-
Hidden Liquidity: Some New Light on Dark Trading
By Robert J. Bloomfield, Maureen O'hara, ...
-
Supply and Information Content of Order Book Depth: The Case of Displayed and Hidden Depth
By Klaus Belter
-
Optimal Order Exposure and the Market Impact of Limit Orders
By Gökhan Cebiroglu and Ulrich Horst
-
Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers
By Alex Boulatov and Thomas J. George
-
On the Dark Side of the Market: Identifying and Analyzing Hidden Order Placements
By Nikolaus Hautsch and Ruihong Huang
-
Does Hidden Liquidity Harm Price Efficiency?
By Gökhan Cebiroglu, Nikolaus Hautsch, ...
-
The Friction-Free Weighted Price Contribution
By David Abad and Roberto Pascual