Arbeitspapier
Market efficiency reloaded: why insider trades do not reveal exploitable information
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.
- Language
-
Englisch
- Bibliographic citation
-
Series: Working Paper ; No. 2008-04
- Classification
-
Wirtschaft
Portfolio Choice; Investment Decisions
Information and Market Efficiency; Event Studies; Insider Trading
- Subject
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Insider Trading
Directors' Dealings
Arbitrage Risk
Market Efficiency
Insiderhandel
Markteffizienz
Deutschland
- Event
-
Geistige Schöpfung
- (who)
-
Dickgiesser, Sebastian
Kaserer, Christoph
- Event
-
Veröffentlichung
- (who)
-
Technische Universität München, Center for Entrepreneurial and Financial Studies (CEFS)
- (where)
-
München
- (when)
-
2008
- Handle
- Last update
-
10.03.2025, 11:41 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Dickgiesser, Sebastian
- Kaserer, Christoph
- Technische Universität München, Center for Entrepreneurial and Financial Studies (CEFS)
Time of origin
- 2008
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