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Does Insider Trading Raise Market Volatility?

  • Shang-Jin Wei
  • Julan Du
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    This paper studies the role of insider trading in explaining cross-country differences in stock market volatility. The central finding is that countries with more prevalent insider trading 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 of monetary and fiscal policies). Moreover, the effect of insider trading is quantitively significant when compared with the effect of economic fundamentals.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16312
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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/51.

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    Length: 42
    Date of creation: 01 Mar 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/51
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    1. Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-41, December.
    2. 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.
    3. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
    4. Benabou, Roland & Laroque, Guy, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 921-58, August.
    5. Claessens, Stijn & Djankov, Simeon & Nenova, Tatiana, 2000. "Corporate risk around the world," Policy Research Working Paper Series 2271, The World Bank.
    6. Manove, Michael, 1989. "The Harm from Insider Trading and Informed Speculation," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 823-45, November.
    7. 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.
    8. Randall Morck & Bernard Yeung & Wayne Yu, 1999. "The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?," Harvard Institute of Economic Research Working Papers 1879, Harvard - Institute of Economic Research.
    9. Randall Morck & David Stangeland & Bernard Yeung, 2000. "Inherited Wealth, Corporate Control, and Economic Growth The Canadian Disease?," NBER Chapters, in: Concentrated Corporate Ownership, pages 319-372 National Bureau of Economic Research, Inc.
    10. 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.
    11. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
    12. Engel, Charles M & Rose, Andrew K, 2001. "Currency Unions and International Integration," CEPR Discussion Papers 2659, C.E.P.R. Discussion Papers.
    13. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
    14. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, 02.
    15. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    16. Chowdhury, Mustafa & Howe, John S. & Lin, Ji-Chai, 1993. "The Relation between Aggregate Insider Transactions and Stock Market Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(03), pages 431-437, September.
    17. Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, vol. 16(2), pages 189-212, June.
    18. John, Kose & Lang, Larry H P, 1991. " Insider Trading around Dividend Announcements: Theory and Evidence," Journal of Finance, American Finance Association, vol. 46(4), pages 1361-89, September.
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