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The Performance Analysis of Trading Strategies Based on Insider Silence

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  • Han-Ching Huang
  • Guan-Yu Chen

Abstract

Seyhun (1986) argues that insider buying predicts positive future returns, while insider selling reveals only a slight signal to predict negative future returns, possibly to satisfy liquidity needs. Gao et al. (2021) find that insiders are afraid of exposure to litigation risk, they neither sell their stocks on bad news nor buy, so insiders keep silent. Based on Gao et al. (2021), we construct the portfolio, which is to buy the “insider sell†group and to sell the “insider silence†group. According to Johnson and So (2012), the O/S portfolio is constructed based on the ratio of individual stock options to the trading volume of the underlying stock. F/S portfolio is constructed by the ratio of individual stock futures to the trading volume of the underlying stock. We find that under the holding period of more than one year, the performance of insider trading strategy is better than other strategies. Specifically, “buying insider purchases and selling insider sales†strategies are more profitable with longer holding periods. Moreover, the longer the holding period of OS and FS strategies, the greater the negative return effect.  JEL classification numbers: G11, G12, G14.

Suggested Citation

  • Han-Ching Huang & Guan-Yu Chen, 2024. "The Performance Analysis of Trading Strategies Based on Insider Silence," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 14(2), pages 1-4.
    • Handle: RePEc:spt:apfiba:v:14:y:2024:i:2:f:14_2_4
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    References listed on IDEAS

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    More about this item

    Keywords

    Insider trading; Insider silence; OS strategy; FS strategy; and one- dimensional strategy.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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