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Political Insider Trading: A narrow versus comprehensive approach

Author

Listed:
  • Jan Hanousek

    (Department of Finance, University of South Florida, Tampa, FL 33620, Faculty of Business and Economics, Department of Finance, Mendel University in Brno, Czech Republic)

  • Christos Pantzalis

    (Kate Tiedemann School of Business and Finance, Muma College of Business, BSN3403, University of South Florida, Tampa, FL 33620)

  • Jung Chul Park

    (Kate Tiedemann School of Business and Finance, Muma College of Business, BSN3403, University of South Florida, Tampa, FL 33620)

Abstract

We examine senators’ electronically filed stock transactions between 2012 and 2019 to assess the extent of politician’s insider trading. Our results suggest that senators use inside political information when investing and earn significant market-adjusted returns. To extend traditional return-based methods, we propose a new comprehensive approach based on abnormal idiosyncratic volatility (AIV), which captures the degree of information asymmetry around their trading dates. We document that senator trades are associated with substantially high levels of AIV, suggesting that they represent only a tip of the iceberg, since the mass of unfiled transactions using the same inside information remains undetected.

Suggested Citation

  • Jan Hanousek & Christos Pantzalis & Jung Chul Park, 2021. "Political Insider Trading: A narrow versus comprehensive approach," MENDELU Working Papers in Business and Economics 2021-77, Mendel University in Brno, Faculty of Business and Economics.
    • Handle: RePEc:men:wpaper:77_2021
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    References listed on IDEAS

    as
    1. Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, vol. 82(1), pages 103-133, October.
    2. Tahoun, Ahmed, 2014. "The role of stock ownership by US members of Congress on the market for political favors," Journal of Financial Economics, Elsevier, vol. 111(1), pages 86-110.
    3. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    4. Yang, Yung Chiang & Zhang, Bohui & Zhang, Chu, 2020. "Is information risk priced? Evidence from abnormal idiosyncratic volatility," Journal of Financial Economics, Elsevier, vol. 135(2), pages 528-554.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    6. Ziobrowski, Alan J. & Cheng, Ping & Boyd, James W. & Ziobrowski, Brigitte J., 2004. "Abnormal Returns from the Common Stock Investments of the U.S. Senate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(4), pages 661-676, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Abnormal idiosyncratic volatility; legislator’s trading; politician’s insider trading; STOCK Act;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • 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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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