Market efficiency reloaded: why insider trades do not reveal exploitable information

Sebastian Dickgiesser and Christoph Kaserer

No 2008-04, CEFS Working Paper Series from Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS)

Abstract: Insider trading studies related to the German market have emphasized that outside investors may earn excess returns by mimicking the transactions of corporate directors. Such a result, provided that it holds, would constitute a serious violation of the efficient market hypothesis. The results presented in this paper, though, show that this anomaly is mainly caused by a subset of stocks with high arbitrage risk as measured by their idiosyncratic volatility. This restrains arbitrageurs from engaging in otherwise profitable and price-correcting trades. As arbitrage risk is positively related to a stock's bid/ask-spread, we show that the information conveyed by insider trades cannot be exploited in terms of generating abnormal returns once these transaction costs are taken into account. We conclude that the market's under-reaction to reported insider trades can mainly be explained by the cost associated with risky arbitrage. Our findings provide evidence that the German stock market is efficient with respect to insider trades in the sense that prices reflect publicly available information to the point where the marginal benefit of acting on information exceeds marginal costs.

Keywords: Insider Trading; Directors' Dealings; Arbitrage Risk; Market Efficiency (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/48405/1/577537539.pdf (application/pdf)

Related works:
Journal Article: Market Efficiency Reloaded: Why Insider Trades do not Reveal Exploitable Information (2010)
Journal Article: Market Efficiency Reloaded: Why Insider Trades do not Reveal Exploitable Information (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cefswp:200804

Access Statistics for this paper

More papers in CEFS Working Paper Series from Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().