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Market Efficiency Reloaded: Why Insider Trades do not Reveal Exploitable Information

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  • Sebastian Dickgiesser
  • Christoph Kaserer

Abstract

Several studies have emphasized a slow price adjustment to reported insider trades for Germany. The results presented in this paper, though, show that this is mainly caused by a subset of high arbitrage risk stocks. In fact, the abnormal return difference between the quintiles of stocks with highest and lowest idiosyncratic risk is in the range of 2.99-4.90% over a 20-day interval. These results are robust even in the context of a joint generalized least squares approach. By developing a simple zero-investment arbitrage trading strategy mimicking insider trades, it turns out that such a trading strategy, in most cases, generates significant positive returns as long as transaction costs are neglected. However, the outperformance disappears in all risk quintiles, if bid/ask spreads are taken into account. We conclude that the market's under-reaction to reported insider trades can mainly be explained by the cost of risky arbitrage and is therefore not exploitable. Copyright 2009 The Authors. Journal Compilation Verein für Socialpolitik and Blackwell Publishing Ltd. 2009.

Suggested Citation

  • Sebastian Dickgiesser & Christoph Kaserer, 2010. "Market Efficiency Reloaded: Why Insider Trades do not Reveal Exploitable Information," German Economic Review, Verein für Socialpolitik, vol. 11, pages 302-335, August.
  • Handle: RePEc:bla:germec:v:11:y:2010:i::p:302-335
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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;Deutsche Statistische Gesellschaft - German Statistical Society, vol. 5(2), pages 145-157, August.
    2. repec:bpj:pewipo:v:18:y:2017:i:2:p:98-116:n:4 is not listed on IDEAS
    3. repec:spr:decisn:v:44:y:2017:i:4:d:10.1007_s40622-017-0167-3 is not listed on IDEAS

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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