Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades

61 Pages Posted: 26 Nov 2018

See all articles by Kenneth R. Ahern

Kenneth R. Ahern

University of Southern California - Marshall School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2018

Abstract

This paper exploits hand-collected data on illegal insider trades to test whether standard illiquidity measures can detect informed trading. Controlling for unobserved cross-sectional and time-series variation, sampling bias, and strategic timing of insider trades, I find that only absolute order imbalance and the negative autocorrelation of order flows are statistically and economically robust predictors of insider trading. However, this result only holds for short-lived information. When information is long-lived, none of the measures of illiquidity I consider detect informed trading, including bid-ask spreads, Kyle's lambda, and Amihud illiquidity. These results suggest that standard measures of illiquidity have limited applications.

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Suggested Citation

Ahern, Kenneth Robinson, Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades (February 2018). NBER Working Paper No. w24297. Available at SSRN: https://ssrn.com/abstract=3288999

Kenneth Robinson Ahern (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~kahern/

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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