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