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Chasing private information

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Title: Chasing private information
Authors: Kacperczyk, MT
Pagnotta, E
Item Type: Journal Article
Abstract: Using over 5000 equity and option trades unequivocally based on nonpublic information about firm fundamentals, we find that commonly used asymmetric information proxies (AIPs) display abnormal values on days with informed trading. Volatility and trading volume are abnormally high, whereas illiquidity is low, both in equity and option markets. Daily returns reflect the sign of private signals but, on average, bid–ask spreads are 10% and 20% lower when informed investors are present in stock and option markets. Market makers’ learning under event uncertainty and the use of limit orders by informed investors help explain these findings. We characterize cross-sectional responses based on the duration of private information and find that informed traders select days with high uninformed volume to trade. Evidence from the U.S. Securities and Exchange Commission (SEC) Whistleblower Reward Program and the Financial Industry Regulatory Authority (FINRA) involvement address potential selection concerns.
Issue Date: 1-Dec-2019
Date of Acceptance: 17-Dec-2018
URI: http://hdl.handle.net/10044/1/68633
DOI: 10.1093/rfs/hhz029
ISSN: 0893-9454
Publisher: Oxford University Press (OUP)
Start Page: 4997
End Page: 5047
Journal / Book Title: The Review of Financial Studies
Volume: 32
Issue: 12
Copyright Statement: © The Author(s) 2019. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. This is a pre-copy-editing, author-produced version of an article accepted for publication in The Review of Financial Studies following peer review. The definitive publisher-authenticated version Marcin Kacperczyk, Emiliano S. Pagnotta, Chasing Private Information, The Review of Financial Studies, , hhz029, is available online at: https://doi.org/10.1093/rfs/hhz029
Sponsor/Funder: Commission of the European Communities
Funder's Grant Number: PCIG14-GA-2013-631775
Keywords: Social Sciences
Business, Finance
Business & Economics
1401 Economic Theory
1402 Applied Economics
1502 Banking, Finance and Investment
Publication Status: Published
Online Publication Date: 2019-03-08
Appears in Collections:Imperial College Business School