Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades
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.
I thank seminar participants at Indiana University for useful feedback on this paper. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Kenneth R Ahern, 2020. "Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades," The Review of Asset Pricing Studies, vol 10(3), pages 397-440.