Do prices reveal the presence of informed trading?

Pierre Collin-Dufresne and Vyacheslav Fos

No 18452, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G0 G00 G1 G10 G12 G14 G3 G34 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-cta and nep-mst
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Published as 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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