Chasing private information

• Main Authors: KACPERCZYK, Marcin, PAGNOTTA, Emiliano Sebastian
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Private information; information signals; adverse selection proxies; insider trading; trading strategies; liquidity; asset prices; abnormal volume; stock markets; option markets; volatility; SEC; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7027; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8026/viewcontent/Chasing_Private_Information_av.pdf
• Institution: Singapore Management University

Using over 5,000 trades unequivocally based on nonpublic information about firm fundamentals, we find that asymmetric information proxies display abnormal values on days with informed trading. Volatility and volume are abnormally high, whereas illiquidity is low, in equity and option markets. Daily returns reflect the sign of private signals, but bid-ask spreads are lower when informed investors trade. Market makers' learning under event uncertainty and limit orders help explain these findings. The cross-section of information duration indicates that traders select days with high uninformed volume. Evidence from the U.S. SEC Whistleblower Reward Program and the FINRA involvement addresses selection concerns.