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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

    (University of Melbourne)

  • Adi Schnytzer

    ()
    (Bar-Ilan University)

Abstract

This article uses trading data in the options market for shares in The Bear Sterns Companies (BSC) during the early stages of the US sub-prime crisis as a laboratory to examine the incidence of insider trading. 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 indicative of insiders. Half the value of options traded 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

Paper provided by Bar-Ilan University, Department of Economics in its series Working Papers with number 2011-11.

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Date of creation: Mar 2011
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Handle: RePEc:biu:wpaper:2011-11

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Keywords: insider trading; forensic finance; Bear Sterns;

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  1. Fidrmucova, J. & Goergen, M. & Renneboog, L.D.R., 2005. "Insider Trading, News Releases and Ownership Concentration," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2005-025, Tilburg University, Tilburg Law and Economic Center.
  2. 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.
  3. Justin Wolfers, 2006. "Point Shaving: Corruption in NCAA Basketball," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 279-283, May.
  4. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 2(2), pages 161-74, Spring.
  5. 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, University of Buckingham Press, vol. 1(1), pages 31-55, February.
  6. Schnytzer, Adi & Shilony, Yuval, 1995. "Inside Information in a Betting Market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(431), pages 963-71, July.
  7. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 47(3), pages 1031-59, July.
  8. 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, University of Chicago Press, vol. 97(5), pages 1232-54, October.
  9. Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, Elsevier, vol. 16(2), pages 189-212, June.
  10. 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.
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