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Market efficiency reloaded: why insider trades do not reveal exploitable information

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  • Dickgiesser, Sebastian
  • Kaserer, Christoph

Abstract

Insider trading studies related to the German market have emphasized that outside investors may earn excess returns by mimicking the transactions of corporate directors. Such a result, provided that it holds, would constitute a serious violation of the efficient market hypothesis. The results presented in this paper, though, show that this anomaly is mainly caused by a subset of stocks with high arbitrage risk as measured by their idiosyncratic volatility. This restrains arbitrageurs from engaging in otherwise profitable and price-correcting trades. As arbitrage risk is positively related to a stock's bid/ask-spread, we show that the information conveyed by insider trades cannot be exploited in terms of generating abnormal returns once these transaction costs are taken into account. We conclude that the market's under-reaction to reported insider trades can mainly be explained by the cost associated with risky arbitrage. Our findings provide evidence that the German stock market is efficient with respect to insider trades in the sense that prices reflect publicly available information to the point where the marginal benefit of acting on information exceeds marginal costs. --

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Bibliographic Info

Paper provided by Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München in its series CEFS Working Paper Series with number 2008-04.

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Date of creation: 2008
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Handle: RePEc:zbw:cefswp:200804

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Related research

Keywords: Insider Trading; Directors' Dealings; Arbitrage Risk; Market Efficiency;

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References

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Cited by:
  1. Nicolai Bissantz & Verena Steinorth & Daniel Ziggel, 2011. "Stabilität von Diversifikationseffekten im Markowitz-Modell," AStA Wirtschafts- und Sozialstatistisches Archiv, Springer, vol. 5(2), pages 145-157, August.

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