Working Paper: CEPR ID: DP12871
Authors: Marcin Kacperczyk; Emiliano Pagnotta
Abstract: Using over 5000 equity and option trades unequivocally based on nonpublic information about firm fundamentals, we find that widely used adverse selection signals display abnormal values on days with informed trading. Volatility and volume values are abnormally high, whereas illiquidity values are low, both in equity and options markets. Signals are more sensitive to informed trading in options markets and before unscheduled corporate announcements. We characterize cross-sectional responses based on the sign, type, and duration of private information. Evidence from the U.S. Securities and Exchange Commission (SEC) Whistleblower Reward Program addresses potential selection concerns.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| informed trading (G14) | abnormal behavior of information signals (D83) |
| informed trading (G14) | volatility measures increase (C58) |
| informed trading (G14) | implied volatility for calls and puts increases (G40) |
| informed trading (G14) | illiquidity measures decrease (G33) |
| informed trading (G14) | increased volatility and abnormal volume (E32) |
| signals from options markets (G13) | more sensitivity to informed trading (G14) |
| unscheduled events (G14) | stronger response of information signals (C45) |
| profitability of trades (G13) | conditional behavior of information signals (D83) |