Working Paper: NBER ID: w18452
Authors: Pierre Collin-Dufresne; Vyacheslav Fos
Abstract: Using a comprehensive sample of trades by Schedule 13D filers, who possess valuable private information when they accumulate stocks of targeted companies, this paper studies whether several liquidity measures reveal the presence of informed trading. The evidence suggests that when Schedule 13D filers trade aggressively, both high-frequency and low-frequency measures of stock liquidity indicate a higher stock liquidity. Importantly, measures that have been used as direct proxies for adverse selection, such the Kyle (1985) lambda, the Easley et al. (1996) pin measure, and the Amihud (2002) illiquidity measure, suggest that the adverse selection is lower when informed trading takes place. The evidence is consistent with informed traders being more aggressive when measured stock liquidity is high.
Keywords: informed trading; liquidity measures; Schedule 13D filers; adverse selection
JEL Codes: G00; G1; G10; G12; G14; G3; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market conditions and aggregate trading volume (G19) | Observed relationships (C29) |
| Trades by Schedule 13D filers (G14) | Stock prices (G19) |
| Informed trading (G14) | Liquidity measures (E41) |
| Liquidity measures (E41) | Presence of informed traders (G14) |