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

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  • Dickgiesser Sebastian
  • Kaserer Christoph

    (Center for Entrepreneurial and Financial Studies (CEFS), Munich, Germany)

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 out-performance 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.

Suggested Citation

  • Dickgiesser Sebastian & Kaserer Christoph, 2010. "Market Efficiency Reloaded: Why Insider Trades do not Reveal Exploitable Information," German Economic Review, De Gruyter, vol. 11(3), pages 302-335, August.
    • Handle: RePEc:bpj:germec:v:11:y:2010:i:3:p:302-335
    DOI: 10.1111/j.1468-0475.2009.00476.x
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    2. Hussmann, Helge & Fieberg, Christian, 2014. "10 Jahre Directors’ Dealings in Deutschland – Gesetzliche Regelungen, empirische Entwicklung und Forschungsstand," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 68(1), pages 47-64.
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    4. Shallu Arora & Meena Sharma & A. K. Vashisht, 2017. "Impact of managerial ability and firm-specific variables on insider’s abnormal returns," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 44(4), pages 275-286, December.

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    More about this item

    Keywords

    Insider trading; directors’ dealings; arbitrage risk; market efficiency;
    All these keywords.

    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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