Chasing Private Information
61 Pages Posted: 24 Nov 2015 Last revised: 20 Apr 2018
Date Written: April 10, 2018
Using over 5000 equity and option trades unequivocally based on nonpublic information about firm fundamentals, we find that widely used adverse selection signals display abnormal values on days with informed trading. Volatility and volume values are abnormally high, whereas illiquidity values are low, both in equity and options markets. Signals are more sensitive to informed trading in options markets and before unscheduled corporate announcements. We characterize cross-sectional responses based on the sign, type, and duration of private information. Evidence from the U.S. Securities and Exchange Commission (SEC) Whistleblower Reward Program addresses potential selection concerns.
Keywords: Private information, information signals, adverse selection proxies, insider trading, trading strategies, liquidity, asset prices, abnormal volume, stock markets, option markets, volatility, SEC
JEL Classification: G12, G14, G10
Suggested Citation: Suggested Citation