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Detecting the presence of insider trading via structural break tests

Jose Olmo (), Keith Pilbeam and William Pouliot

Journal of Banking & Finance, 2011, vol. 35, issue 11, 2820-2828

Abstract: The occurrence of abnormal returns before the unscheduled announcement of price sensitive information is a potential indicator of insider trading. We identify insider trading with a structural change in the intercept of an extended capital asset pricing model. To detect such a change we introduce a consistent timing structural break test (CTSB) based upon a U-statistic type process. Unlike the traditional CUSUM test, the CTSB test provides a consistent estimator of the timing of a break in the intercept that occurs across the whole evaluation period. We apply our test to a rich data set covering 370 price sensitive announcements relating to FTSE 350 companies. Our test is able to detect potential insider trading far more reliably than the standard CUSUM test. We also show that the majority of suspected insider trading takes place in the 25Â days prior to the release of market sensitive information.

Keywords: CUSUM; tests; ECAPM; Insider; trading; Structural; change; U-statistics (search for similar items in EconPapers)
Date: 2011
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