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- Title
Are Insider Trading Profits Due to Contrarian Trading or Private Information?
- Authors
GANGOPADHYAY, PARTHA; YOOK, KEN C.
- Abstract
There is ample evidence in the literature that insider trading generates abnormal return. Several researchers have documented evidence that short-term insider trading profits arise mainly from contrarian trading by insiders. Cohen, Malloy and Pomorski (2012) separate insider trades into opportunistic and routine trades and find that the opportunistic trades produce short-term profits whereas the routine trades do not produce profits. They conclude that the opportunistic trades are based on useful private information of insiders. Their results for the opportunistic trades contradict the evidence in the extant literature, which finds that short-term insiders trading profits arise almost entirely from contrarian trading. In this paper we show that profits from opportunistic insider trades are positively correlated with stock idiosyncratic volatilities (IVOL). After adjusting for contrarian trading, we find that the abnormal returns are much smaller than what was previously reported. Thus, most of the abnormal profits from the opportunistic trades are due to contrarian trading in high-IVOL stocks in which limited arbitrage creates mispricing and opportunities for profit.
- Subjects
INFORMATION theory in economics; ABNORMAL returns; MARKET volatility; STOCKS (Finance); IDIOSYNCRATIC risk (Securities)
- Publication
Quarterly Journal of Finance & Accounting, 2015, Vol 53, Issue 3/4, p1
- ISSN
1939-8123
- Publication type
Article