Do prices reveal the presence of informed trading?

Pierre Collin-Dufresne, Vyacheslav Fos

NBER Working Paper No. 18452
Issued in October 2012
NBER Program(s):   AP   CF   LE

Using a comprehensive sample of trades by Schedule 13D filers, who possess valuable private information when they accumulate stocks of targeted companies, this paper studies whether several liquidity measures reveal the presence of informed trading. The evidence suggests that when Schedule 13D filers trade aggressively, both high-frequency and low-frequency measures of stock liquidity indicate a higher stock liquidity. Importantly, measures that have been used as direct proxies for adverse selection, such the Kyle (1985) lambda, the Easley et al. (1996) pin measure, and the Amihud (2002) illiquidity measure, suggest that the adverse selection is lower when informed trading takes place. The evidence is consistent with informed traders being more aggressive when measured stock liquidity is high.

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Document Object Identifier (DOI): 10.3386/w18452

Published: Do Prices Reveal the Presence of Informed Trading? PIERRE COLLIN-DUFRESNE andVYACHESLAV FOS† Article first published online: 23 JUL 2015 DOI: 10.1111/jofi.12260 The Journal of Finance Volume 70, Issue 4, pages 1555–1582, August 2015

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