Profitability analysis of informative insiders and market efficiency
Identification of insiders whose transactions allow us to predict market movements of securities. Analysis of the predictive effectiveness of various approaches to identify potentially informative transactions at various levels of market liquidity.
| Рубрика | Банковское, биржевое дело и страхование |
| Вид | курсовая работа |
| Язык | английский |
| Дата добавления | 07.12.2019 |
| Размер файла | 1023,5 K |
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0.117
-0.00
(0.096)
(0.044)
(0.126)
(0.026)
(0.086)
(0.030)
Quantile 2
-0.09
-0.02
0.131
-0.04
0.032
-0.02
(0.085)
(0.045)
(0.068)
(0.035)
(0.052)
(0.023)
Quantile 3
-0.03
-0.01
-0.00
0.006
0.039
-0.00
(0.041)
(0.032)
(0.046)
(0.043)
(0.064)
(0.038)
Quantile 4
-0.06
0.013
-0.07
-0.02
0.017
-0.00
(0.072)
(0.036)
(0.164)
(0.040)
(0.060)
(0.032)
Quantile 5
0.082
-0.02
0.006
-0.04
0.107
0.031
(0.090)
(0.034)
(0.070)
(0.040)
(0.066)
(0.031)
Table 7Source: calculations of the author
|
High-liquidity portfolio alphas regressed on Fama, French 3 factors. For representation purposes, only alphas are reported from the models estimated. |
|||||||
|
Director Buy |
Director Sell |
Officer Buy |
Officer Sell |
Director and Officer Buy |
Director and Officer Sell |
||
|
Quantile 1 |
-0.19* |
-0.02 |
-0.12 |
-0.03 |
-0.04 |
-0.05. |
|
|
(0.085) |
(0.050) |
(0.095) |
(0.033) |
(0.095) |
(0.032) |
||
|
Quantile 2 |
-0.14 |
-0.03 |
-0.30*** |
-0.01 |
-0.01 |
-0.06* |
|
|
(0.092) |
(0.046) |
(0.030) |
(0.038) |
(0.063) |
(0.023) |
||
|
Quantile 3 |
-0.09. |
-0.09** |
-0.09 |
-0.01 |
-0.04 |
-0.03 |
|
|
(0.048) |
(0.032) |
(0.061) |
(0.054) |
(0.073) |
(0.043) |
||
|
Quantile 4 |
-0.03 |
-0.01 |
-0.24 |
0.032 |
-0.14 |
-0.05 |
|
|
(0.087) |
(0.037) |
(0.205) |
(0.042) |
(0.091) |
(0.036) |
||
|
Quantile 5 |
0.053 |
-0.03 |
0.038 |
-0.01 |
-0.00 |
-0.02 |
|
|
(0.098) |
(0.032) |
(0.104) |
(0.046) |
(0.080) |
(0.035) |
In spite of various regression results from Hypothesis 1 testing, the portfolio evaluation outcomes are quite similar for both highest and lowest liquid segments. Regressing solely on market returns shows no significance for alphas neither in low nor in high-liquidity portfolios. Employing the 3 factor model, however allows achieving the significance for some segments. Namely, it can be seen that portfolios based on low quantile insiders, that is those who had lowest profits, significantly underperform the market. This allows concluding that being unprofitable in the pre-QEA window serves as a signal for subsequent consistent underperformance of particular insider.
Therefore, it can be concluded that when it comes to portfolio performance comparison, there is no evidence of systematically outperforming the market regardless the level of stock liquidity. Furthermore, one should remember that low liquidity market implies the highest bid-ask spreads as well, which would result in further reduction of profits in real life. Still, there are significant negative alphas are observed among the least profitable (quantiles 1 - 3) insiders, which provides interesting observation from scientific point of view that such insiders consistently underperform the market.
Conclusion
In this work, the predictive power of attributes of insiders is evaluated under different liquidity scenarios. The fact that market maker sets various levels of bid-ask spreads depending on degree insiders' `informativeness' within particular company allows to assess the results of previous studies from the new perspective. The intuition linking the level of insiders' predictive ability with the size of bid-ask spread is also supported by the Fishman and Hagerty's model. Their model predicts that this relation is represented by the concave function, while as real world evidence demonstrates that the left tail part of this function is more relevant, because probability of observing informed insider is likely to be below 50%.
The hypotheses introduced in this study rely on the role of market liquidity. In fact, evidence has shown that regression results achieved with Ali et. al's methodic vary depending on liquidity level. While as the predictive power is the most significant in least liquid segment of the market and significant in the medium segment, the transaction of quantile 5 directors and officers bear no valuable information regarding future return in the most liquid segment of the market.
The next step was to examine whether following the transactions performed by quantile insiders from the least liquid segment generates the abnormal returns. For this purpose, the portfolios were constructed based on the transaction of Quantile 5 directors and officers from the low and high liquidity segments. For the sake of comparison, the portfolios were also evaluated for insiders from lower quantiles. The evidence of positive alphas for the most profitable insiders was not found both when regressing solely on market return and on the three factors regardless of the liquidity level. Thus, hypothesis 2 is not supported because results are equally insignificant for both high and low levels of market liquidity. Still, this allows to conclude that no evidence against the efficient market hypothesis was found in this particular study. However, in case of three factor model, there was evidence of significant negative alphas for the least profitable insiders. This allows concluding that such insiders underperform the market consistently.
This study contributed to the academic field devoted to studying the informed insiders' patterns. It provided the extension to the field based on link between level of insiders' informativeness and bid-ask spread quoted by the market maker. Besides, this intuition is supported by the theoretical model. Dividing sample on the basis of liquidity allowed distinguishing the group of transactions, which provide no predictive power and which were not excluded in the previous studies. It was also demonstrated that portfolio strategy based on the transactions of insiders predicted to be informed did not generate significant positive alphas. Therefore, no evidence against the semi-strong efficient market hypothesis was observed.
List of References
transaction market insider
1. Ali. U, Hirshleifer David, «Opportunism as a firm and managerial trait: Predicting insider trading profits and misconduct», Journal of Financial Economics, 2017, pg. 1-83
2. Cline B.N., Gokkaya. S., Liu. X, «The Persistence of Opportunistic Insider Trading» ,Financial Management, 2017, pg. 1 - 46
3. Cohen L., Malloy C., Pomorski L., «Decoding Inside Information», THE JOURNAL OF FINANCE , 2012, pg. 1009-1043
4. Fama E.F., French K.R., «Common risk factors in the returns on stocks and bonds». Journal of Financial Economics, 1993, pg. 3-56
5. Fama E.F., French K.R., «The Cross-Section of Expected Stock Returns», Journal of Financial Economics, 1992, pg. 427
6. Fishman J, M., Hagerty K. M., «The Mandatory Disclosure of Trades and Market Liquidity», The Review of Financial Studies, 1995; Global pg. 637-676
7. https://www.fidelity.com/
8. https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
9. https://www.sec.gov/
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