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Does Insider Trading Raise Market Volatility?

  • Julan Du

    (Chinese University of Hong Kong)

  • Shang-Jin Wei

    (International Monetary Fund
    Brookings Institution)

This paper studies the role of insider trading in explaining cross-country difference in stock market volatility. It introduces a new (albeit imperfect) measure of insider trading for 50 or so countries. The central finding is that countries with more prevalent insider trading do have more volatile stock markets, even after one controls for liquidity/maturity of the market, and the volatility of the underlying fundamentals (volatility of real output, and monetary and fiscal policies). Moreover, the effect of insider trading is quantitatively significant when compared with the effect of economic fundamentals.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 072002.

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Length: 32 pages
Date of creation: Mar 2002
Date of revision:
Handle: RePEc:hkm:wpaper:072002
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  1. Randall K. Morck & David A. Stangeland & Bernard Yeung, 1998. "Inherited Wealth, Corporate Control and Economic Growth: The Canadian Disease," NBER Working Papers 6814, National Bureau of Economic Research, Inc.
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  8. Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, vol. 16(2), pages 189-212, June.
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  12. Leland, Hayne E, 1992. "Insider Trading: Should It Be Prohibited?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 859-87, August.
  13. John Elliott & Dale Morse & Gordon Richardson, 1984. "The Association between Insider Trading and Information Announcements," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 521-536, Winter.
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  15. Claessens, Stijn & Djankov, Simeon & Nenova, Tatiana, 2000. "Corporate risk around the world," Policy Research Working Paper Series 2271, The World Bank.
  16. Randall K. Morck & David A. Strangeland & Bernard Yeung, 1998. "Inherited Wealth, Corporate Control and Economic Growth," William Davidson Institute Working Papers Series 209, William Davidson Institute at the University of Michigan.
  17. Roland Benabou & Guy Laroque, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 921-958.
  18. John Matatko & Alan Gregory & Ian Tonks & Richard Purkis, 1993. "UK Directors Trading: The Impact of Dealings in Smaller Firms," FMG Discussion Papers dp160, Financial Markets Group.
  19. Givoly, Dan & Palmon, Dan, 1985. "Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence," The Journal of Business, University of Chicago Press, vol. 58(1), pages 69-87, January.
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