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Informed Trading (informed + trading)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

Insider Trading after Repurchase Tender Offer Announcements: Timing versus Informed Trading

FINANCIAL MANAGEMENT, Issue 1 2010
Henock Louis
Abnormally high net insider selling is commonly observed after repurchase tender offer (RTO) announcements although, on average, firms experience positive abnormal returns in the years after the repurchases. We explore two potential explanations: liquidity trade timing and informed trading. Consistent with the notion that fixed price RTOs are more likely than Dutch-auction RTOs to signal undervaluation, the results suggest that insider selling after fixed price RTO announcements are driven largely by insiders who time their trades with the repurchase announcements. In contrast, selling after Dutch-auction RTOs seems to be driven primarily by informed traders who exploit mispricing associated with the repurchase announcements. [source]

Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market

FINANCIAL REVIEW, Issue 2 2001
Narayanan Jayaraman
G14/G34 Abstract This paper provides empirical evidence on the level of trading activity in the stock options market prior to the announcement of a merger or an acquisition. Our analysis shows that there is a significant increase in the trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger. This result is robust to both the volume of option contracts traded and the open interest. The increased trading suggests that there is a significant level of informed trading in the options market prior to the announcement of a corporate event. In addition, abnormal trading activity in the options market appears to lead abnormal trading volume in the equity market. This finding supports the hypothesis that the options market plays an important role in price discovery. [source]

Information, Trading, and Product Market Interactions: Cross-sectional Implications of Informed Trading

THE JOURNAL OF FINANCE, Issue 1 2008
HEATHER E. TOOKES
ABSTRACT I present a simple model of informed trading in which asset values are derived from imperfectly competitive product markets and private information events occur at individual firms. The model predicts that informed traders may have incentives to make information-based trades in the stocks of competitors, especially when events occur at firms with large market shares. In the context of 759 earnings announcements, I use intraday transactions data to test the hypothesis that net order flow and returns in the stocks of nonannouncing competitors have information content for announcing firms. [source]

Informed trading in the index option market: The case of KOSPI 200 options

THE JOURNAL OF FUTURES MARKETS, Issue 12 2008
Hee-Joon Ahn
This study examines if informed trading is present in the index option market by analyzing the KOSPI 200 options, the most actively traded derivative product in the world. The spread decomposition model developed by Madhavan, Richardson, and Roomans (1997) is utilized and the adverse-selection cost component of the spread estimated by the model is then used as a proxy for the degree of informed trading. We find that adverse-selection costs constitute a nontrivial portion of the transaction costs in index options trading. Approximately one-third of the spread can be accounted for by information asymmetry costs. A further analysis indicates that adverse-selection costs are positively related with option delta. Our regression analysis shows that option-related variables are significantly associated with estimated information asymmetry costs, even when controlling for proxies for informed trading in the index futures market. Finally, we find the evidence that foreign investors are better informed compared to domestic investors and that domestic institutions have an edge in terms of information over domestic individuals. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1118,1146, 2008 [source]

What Explains the Bid-Ask Spread Decline after Nasdaq Reforms?

FINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 5 2003
By Yan He
This paper examines whether the decrease in bid-ask spreads on Nasdaq after the 1997 reforms is due to a decrease in market-making costs and/or an increase in market competition for order flows. Unlike previous studies, we jointly examine how competition and trading costs affect bid-ask spreads. In addition, we separate the effects of informed trading and liquidity costs on bid-ask spreads. Informed trading cost is directly estimated for each Nasdaq stock using a Bayesian theoretic model. Empirical results show that market-making costs and competition significantly affect bid-ask spreads. The post-reform decrease in bid-ask spreads is largely due to both an increase in competition and a decrease in informed trading and liquidity costs on Nasdaq. [source]

Institutional Investors and Information Asymmetry: An Event Study of Self-Tender Offers

FINANCIAL REVIEW, Issue 2 2003
Michele O'Neill
G14/G20/G32 Abstract Our research compares the asymmetric information costs of firms with low levels of institutional ownership to those with high levels. We use self-tender offers as an information event. Our results show that higher institutional ownership, particularly a higher number of institutional investors, is associated with a lower degree of informed trading. These results persist even after we control for differences in trading activity among our sample firms. [source]

Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market

FINANCIAL REVIEW, Issue 2 2001
Narayanan Jayaraman
G14/G34 Abstract This paper provides empirical evidence on the level of trading activity in the stock options market prior to the announcement of a merger or an acquisition. Our analysis shows that there is a significant increase in the trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger. This result is robust to both the volume of option contracts traded and the open interest. The increased trading suggests that there is a significant level of informed trading in the options market prior to the announcement of a corporate event. In addition, abnormal trading activity in the options market appears to lead abnormal trading volume in the equity market. This finding supports the hypothesis that the options market plays an important role in price discovery. [source]

Does informed trading occur in the options market?

ACCOUNTING & FINANCE, Issue 3 2010
Some revealing clues
G13; G14; C22 Abstract This paper analyses the relationship between proxy variables for informed trading in the options market and a set of exogenous news variables. The aim was to test directly for the presence or absence of informed trading in the options market and for the possible impact of this trading on underlying asset prices. Our findings reveal that potential informed trading in options markets is channelled basically through out-of-the-money options, except for volatility trading which mainly involves at-the-money options because of their liquidity. In both cases, we have found evidence in favour of investors' strategic fragmentation of transactions into intermediate size trades (stealth trading). Finally, it is shown that lack of consensus among agents also generates increased trading, particularly in out-of-the-money and at-the-money options. [source]

Information, Trading, and Product Market Interactions: Cross-sectional Implications of Informed Trading

THE JOURNAL OF FINANCE, Issue 1 2008
HEATHER E. TOOKES
ABSTRACT I present a simple model of informed trading in which asset values are derived from imperfectly competitive product markets and private information events occur at individual firms. The model predicts that informed traders may have incentives to make information-based trades in the stocks of competitors, especially when events occur at firms with large market shares. In the context of 759 earnings announcements, I use intraday transactions data to test the hypothesis that net order flow and returns in the stocks of nonannouncing competitors have information content for announcing firms. [source]

Short-Selling Prior to Earnings Announcements

THE JOURNAL OF FINANCE, Issue 4 2004
Stephen E. Christophe
ABSTRACT This paper examines short-sales transactions in the five days prior to earnings announcements of 913 Nasdaq-listed firms. The tests provide evidence of informed trading in pre-announcement short-selling because they reveal that abnormal short-selling is significantly linked to post-announcement stock returns. Also, the tests indicate that short-sellers typically are more active in stocks with low book-to-market valuations or low SUEs. The levels of pre-announcement short-selling, however, mostly appear to reflect firm-specific information rather than these fundamental financial characteristics. We believe that these results should encourage financial market regulators to consider providing more extensive and timely disclosures of short-selling to investors. [source]

Informed trading in the index option market: The case of KOSPI 200 options

THE JOURNAL OF FUTURES MARKETS, Issue 12 2008
Hee-Joon Ahn
This study examines if informed trading is present in the index option market by analyzing the KOSPI 200 options, the most actively traded derivative product in the world. The spread decomposition model developed by Madhavan, Richardson, and Roomans (1997) is utilized and the adverse-selection cost component of the spread estimated by the model is then used as a proxy for the degree of informed trading. We find that adverse-selection costs constitute a nontrivial portion of the transaction costs in index options trading. Approximately one-third of the spread can be accounted for by information asymmetry costs. A further analysis indicates that adverse-selection costs are positively related with option delta. Our regression analysis shows that option-related variables are significantly associated with estimated information asymmetry costs, even when controlling for proxies for informed trading in the index futures market. Finally, we find the evidence that foreign investors are better informed compared to domestic investors and that domestic institutions have an edge in terms of information over domestic individuals. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1118,1146, 2008 [source]

Long-term information, short-lived securities

THE JOURNAL OF FUTURES MARKETS, Issue 5 2006
Dan Bernhardt
The authors explore strategic trade in short-lived securities by agents who have private information that is potentially long-term, but do not know how long their information will remain private. Trading short-lived securities is profitable only if enough of the private information becomes public prior to contract expiration; otherwise the security will worthlessly expire. How this results in trading behavior fundamentally different from that observed in standard models of informed trading in equity is highlighted. Specifically, it is shown that informed speculators are more reluctant to trade shorter-term securities too far in advance of when their information will necessarily be made public, and that existing positions in a shorter-term security make future purchases more attractive. Because informed speculators prefer longer-term securities, this can make trading shorter-term contracts more attractive for liquidity traders. The conditions are characterized under which liquidity traders choose to incur extra costs to roll over short-term positions rather than trade in distant contracts, providing an explanation for why most longer-term derivative security markets have little liquidity and large bid-ask spreads. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:465,502, 2006 [source]

Do Informed Traders Trade More When the Market Is Thick?

ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 4 2010
Evidence from the Nikkei 225 Index Redefinition of April 2000
G10; G14; G15 Abstract Using the Nikkei 225 index redefinition that took place in April 2000, we examine whether informed traders strategically trade more when they face increased liquidity trading, as predicted by Admati & Pfleiderer (1988). The significant increase (decrease) in liquidity trading for the new additions (deletions) caused by index trading activities after index redefinition offers a valuable opportunity to empirically test the predictions of Admati and Pfleiderer. The April 2000 index redefinition was not accompanied by any information effects because the event itself was unrelated to changes in firm fundamentals, nor did it involve any information confirmation effects. Our empirical findings support the predictions of the strategic information trader model. We find that informed trading, as measured by the probability of informed trading, increases significantly after additions and decreases significantly after deletions. Further analysis reveals that probability of informed trading changes are associated with changes in investor composition, especially for domestic institutions and foreign shareholders. [source]