Chasing Private Information

Emiliano Pagnotta
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Emiliano Pagnotta: Imperial College Business School

No 1673, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Using a unique sample of 3,586 equity and option trades based on material and nonpublic information, we examine whether asset prices and trading volume reveal to markets information about the presence of informed trading. We find that information embedded in equity (option) markets offers a weak (strong) signal of private information. Equity market metrics that rely solely on prices or volume fail to be informative while measures that incorporate both are. The most robust metrics combine both option and stock volume. Further, we show that the patterns showing how information is revealed to markets do not depend on whether informed traders strategically delay their trades upon receiving information about the firm. Finally, we document significant information spillovers from equity to option markets, but not vice versa. Overall, our results provide novel guidance in the search for private information.

Date: 2016
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