Are Informed Traders Sensitive to Regulatory Environments?

European Journal of Finance, Forthcoming

37 Pages Posted: 20 Dec 2013 Last revised: 7 Jul 2014

See all articles by Umut Ordu

Umut Ordu

WHU - Otto Beisheim School of Management

Denis Schweizer

Concordia University

Date Written: July 7, 2014

Abstract

This article empirically analyses how investors with private material information decide in which regulatory regime, set by governments in different countries, to trade. We study put-call deviations (which indicate informed trading) for options written solely on U.S.-listed companies and for those with dual listings / headquarter in China. We argue that informed traders actively choose the regulatory regime with the lowest level of regulatory rigorousness in order to exploit private information. We find that the informational content of put-call parity deviations is detectable for companies listed solely in the U.S., but not for Chinese companies. Our evidence suggests that informed traders do not tend to exploit their private information where regulatory rigorousness is high (e.g., a high likelihood of detection and subsequent enforcement). They will instead opt to trade where regulatory rigorousness is low.

Keywords: China, Informed Trading, Market Segmentation, Put-Call Parity

JEL Classification: C10, G14, G15, N25

Suggested Citation

Ordu, Umut and Schweizer, Denis, Are Informed Traders Sensitive to Regulatory Environments? (July 7, 2014). European Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2369498 or http://dx.doi.org/10.2139/ssrn.2369498

Umut Ordu

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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