Decoding Inside Information

Topics - Equities

${ numberSection } ${ text }
Decoding Inside Information

The authors employ a simple empirical strategy to identify “opportunistic” insider trading — that is, purchases or sales by traders with favored access to private information about the given firm — and conclude that portfolio strategy that focuses solely on “opportunistic” traders yields value-weighted abnormal returns of 82 basis points per month. Their analysis rests on the basic premise that insiders trade for many reasons and by ignoring insiders whose trades are “routine” (and hence uninformative) one can discern potentially valuable information about the future of firms.

Using simple definitions of routine traders, the authors contend they can systematically and predictably identify insiders as either “opportunistic” or “routine.” They write that stripping away the uninformative signals of routine traders — those who sell to raise cash or diversify their portfolios — can help to identify opportunistic trades that they assert are “powerful predictors of future firm returns, news and events.”

According to their calculations, the abnormal returns associated with routine traders are essentially zero, but a portfolio strategy focused solely on opportunistic insider trades yields value-weighted abnormal returns of 82 basis points per month or equal-weighted abnormal returns of 180 basis points per month.

The most informed opportunistic traders tend to be local non-senior opportunistic insiders, the authors say, and these traders are likely to come from geographically concentrated firms and poorly governed firms.

Chicago Quantitative Alliance Best Paper Award 2010

Published In

The Journal of Finance

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.


The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.