NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Kenneth R. Ahern

Marshall School of Business
University of Southern California
3670 Trousdale Parkway, HOH 718
Los Angeles, CA 90089
Tel: 213/821-5583

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NBER Program Affiliations: CF
NBER Affiliation: Research Associate

NBER Working Papers and Publications

February 2018Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades
w24297
This paper exploits hand-collected data on illegal insider trades to test whether standard illiquidity measures can detect informed trading. Controlling for unobserved cross-sectional and time-series variation, sampling bias, and strategic timing of insider trades, I find that only absolute order imbalance and the negative autocorrelation of order flows are statistically and economically robust predictors of insider trading. However, this result only holds for short-lived information. When information is long-lived, none of the measures of illiquidity I consider detect informed trading, including bid-ask spreads, Kyle's lambda, and Amihud illiquidity. These results suggest that standard measures of illiquidity have limited applications.
 
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