An Information Factor: What Are Skilled Investors Buying and Selling?

49 Pages Posted: 30 Jul 2018 Last revised: 24 Sep 2019

See all articles by Matthew Ma

Matthew Ma

Southern Methodist University (SMU)

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Matthew Ringgenberg

University of Utah - Department of Finance

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Date Written: September 22, 2019

Abstract

We construct an information factor (INFO) using the informed stock buying of corporate insiders and the informed selling of short sellers and option traders. INFO strongly predicts future stock returns -- a long-short portfolio formed on INFO earns monthly alphas of 1.24%, substantially outperforming existing strategies including momentum. INFO explains hedge fund returns in the time-series and cross-section. Higher values of INFO are associated with increases in aggregate hedge fund value. Moreover, funds with higher covariation between their returns and INFO outperform by 0.28% per month. The results show information processing skill is an important source of return variation.

Keywords: Informed Trading, Insider Trading, Short Selling, Option Trading, Hedge Funds

JEL Classification: G11, G12, G14, G17, G23

Suggested Citation

Ma, Matthew and Martin, Xiumin and Ringgenberg, Matthew C. and Zhou, Guofu, An Information Factor: What Are Skilled Investors Buying and Selling? (September 22, 2019). Available at SSRN: https://ssrn.com/abstract=3205660 or http://dx.doi.org/10.2139/ssrn.3205660

Matthew Ma

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Xiumin Martin

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Matthew C. Ringgenberg (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

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