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The Dog That Did Not Bark: Insider Trading and Crashes

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  • Jacques Olivier
  • José M. Marin

Abstract

This paper documents that at the individual stock level insiders sales peak many months before a large drop in the stock price, while insiders purchases peak only the month before a large jump. We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric information. We test our hypothesis against competing stories such as patterns of insider trading driven by earnings announcement dates, or insiders timing their trades to evade prosecution. Finally we provide new evidence regarding crashes and the degree of information asymmetry.

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File URL: http://research.barcelonagse.eu/tmp/working_papers/241.pdf
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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 241.

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Date of creation: Mar 2006
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Handle: RePEc:bge:wpaper:241

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Keywords: Insider Trading; Rational Expectations Equilibrium; Trading Constraints; Volatility; Crashes;

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References

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  1. Barlevy, Gadi & Veronesi, Pietro, 2003. "Rational panics and stock market crashes," Journal of Economic Theory, Elsevier, vol. 110(2), pages 234-263, June.
  2. Conrad, Jennifer & Kaul, Gautam, 1993. " Long-Term Market Overreaction or Biases in Computed Returns?," Journal of Finance, American Finance Association, American Finance Association, vol. 48(1), pages 39-63, March.
  3. José M. Marín & Rohit Rahi, 1996. "Information revelation and market incompleteness," Economics Working Papers 145, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Joseph Chen & Harrison Hong & Jeremy C. Stein, 2000. "Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices," NBER Working Papers 7687, National Bureau of Economic Research, Inc.
  5. Sylvain Friederich & Alan Gregory & John Matatko & Ian Tonks, 2002. "Short-run Returns around the Trades of Corporate Insiders on the London Stock Exchange," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 8(1), pages 7-30.
  6. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1406, Cowles Foundation for Research in Economics, Yale University.
  7. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
  8. Franklin Allen & Douglas Gale, 1998. "Bubbles and Crises The Economic Journal," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 98-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Harrison Hong & José Scheinkman & Wei Xiong, 2006. "Asset Float and Speculative Bubbles," Journal of Finance, American Finance Association, American Finance Association, vol. 61(3), pages 1073-1117, 06.
  10. H. Henry Cao & Joshua D. Coval & David Hirshleifer, 2002. "Sidelined Investors, Trading-Generated News, and Security Returns," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 615-648, March.
  11. David Romer, 1992. "Rational Asset Price Movements Without News," NBER Working Papers 4121, National Bureau of Economic Research, Inc.
  12. Suleyman Basak & David Cass & Juan Manuel Licari & Anna Pavlova, 2006. "Multiplicity and Sunspots in General Financial Equilibrium with Portfolio Constraints," PIER Working Paper Archive 06-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  13. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 225-38, January.
  14. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  15. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers, University of California at Berkeley RPF-192, University of California at Berkeley.
  16. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 47(5), pages 1661-99, December.
  17. Bhattacharya, U. & Spiegel, M., 1989. "Insiders, Outsiders And Market Breakdowns," Papers fb-_89-20, Columbia - Graduate School of Business.
  18. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
  19. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, Econometric Society, vol. 47(3), pages 655-78, May.
  20. Leslie A. Jeng & Andrew Metrick & Richard Zeckhauser, 2003. "Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 453-471, May.
  21. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 61(2), pages 206-229, December.
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Cited by:
  1. Stefano Giglio & Kelly Shue, 2013. "No News is News: Do Markets Underreact to Nothing?," NBER Working Papers 18914, National Bureau of Economic Research, Inc.
  2. Betzer, André & Gider, Jasmin & Metzger, Daniel & Theissen, Erik, 2010. "Strategic trading and trade reporting by corporate insiders," CFR Working Papers 09-15 [rev.], University of Cologne, Centre for Financial Research (CFR).
  3. Partha Gangopadhyay & Ken Yook & Yoon Shin, 2014. "Insider trading and firm-specific return volatility," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 43(1), pages 1-19, July.
  4. Benjamin Golez & José M. Marín, 2010. "Price support in the stock market," Working Papers, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales 2010-16, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  5. Dong Lou, 2009. "Attracting investor attention through advertising," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 29311, London School of Economics and Political Science, LSE Library.
  6. José M. Marín & Antoni Sureda-Gomila, 2006. "Firms vs. insiders as traders of last resort," Economics Working Papers 999, Department of Economics and Business, Universitat Pompeu Fabra.

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