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Shorting the Bear: A Test of Anecdotal Evidence of Insider Trading in Early Stages of the Sub-Prime Market Crisis

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  • Les Coleman
  • Adi Schnytzer

    (Department of Economics, Bar-Ilan University)

Abstract

This article uses trading data in the options market for shares in The Bear Sterns Companies (BSC) during the first half of 2007 during early stages of the US sub-prime crisis as a laboratory to examine the incidence of insider trading. The principal research objective is to enhance our understanding of the extent of strong form inefficiency in equity derivative markets. The presence of illegal insiders is particularly important to predictive markets as they raise transaction costs and deter participation by outsiders, which reduce the accuracy of price signals and markets' forecasting ability. We take the perspective of a regulator making use of hindsight to identify the most propitious periods for insider trades and to identify market activity that is indicative of insiders. Half the value of BSC options traded during the first half of 2007 were on 19 percent of the days, mostly in contracts in or close-to the money and near to expiry. We find persuasive evidence that insiders could have been active in trading Bear Sterns stock during this period.

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Bibliographic Info

Article provided by University of Buckingham Press in its journal Journal of Prediction Markets.

Volume (Year): 2 (2008)
Issue (Month): 3 (December)
Pages: 61-69

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Handle: RePEc:buc:jpredm:v:2:y:2008:i:3:p:61-69

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Related research

Keywords: INSIDER TRADING; FORENSIC FINANCE; BEAR STERNS;

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  1. Jana P. Fidrmuc & Marc Goergen & Luc Renneboog, 2006. "Insider Trading, News Releases, and Ownership Concentration," Journal of Finance, American Finance Association, vol. 61(6), pages 2931-2973, December.
  2. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, vol. 47(3), pages 1031-59, July.
  3. Les Coleman, 2007. "Just How Serious is Insider Trading? An Evaluation using Thoroughbred Wagering Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 1(1), pages 31-55, February.
  4. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
  5. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-74, Spring.
  6. Charles Cao & Zhiwu Chen & John M. Griffin, 2005. "Informational Content of Option Volume Prior to Takeovers," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1073-1109, May.
  7. Camerer, Colin & Loewenstein, George & Weber, Martin, 1989. "The Curse of Knowledge in Economic Settings: An Experimental Analysis," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1232-54, October.
  8. Schnytzer, Adi & Shilony, Yuval, 1995. "Inside Information in a Betting Market," Economic Journal, Royal Economic Society, vol. 105(431), pages 963-71, July.
  9. Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, vol. 16(2), pages 189-212, June.
  10. Justin Wolfers, 2006. "Point Shaving: Corruption in NCAA Basketball," American Economic Review, American Economic Association, vol. 96(2), pages 279-283, May.
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