insider trading 9-22-04

8/2/2019 Insider Trading 9-22-04

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Who Are They?


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http://images.google.com/imgres?imgurl=http://as.wn.com/i/db/4250422fe678e3.jpg&imgrefurl=http://archive.wn.com/2004/02/15/1400/panamaglobe/&h=220&w=300&sz=11&tbnid=lyZBuTtPqwkJ:&tbnh=81&tbnw=110&start=2&prev=/images%3Fq%3Dmartha%2Binsider%2Btrading%26hl%3Den%26lr%3D%26ie%3DUTF-8%26sa%3DG


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Does Insider Trading RaiseStock Market Volatility?(Economic Journal, Oct 2004)

Julan DuChinese U of HK

and

Shang-Jin WeiIMF and NBER


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Monthly Returns for US, Hong Kong and China

(1992-2000)

-20

-10

0

10

20

30

40

50

Feb-92

Jun-92

Oct-92

Feb-93

Jun-93

Oct-93

Feb-94

Jun-94

Oct-94

Feb-95

Jun-95

Oct-95

Feb-96

Jun-96

Oct-96

Feb-97

Jun-97

Oct-97

Feb-98

Jun-98

Oct-98

Feb-99

Jun-99

Oct-99

Feb-00

Jun-00

Oct-00

month

return(%)

rHSI

rSHA

rS&P


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Market Volatility

standard deviation of monthly stock

returns over 1985:1 - 1998:12


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Stock Market Volatility

00.05

0.10.15

0.20.25

0.3

U .S. HongKong

China R uss ia

U.S.Hong KongChinaRussia


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Is volatility good or bad?

signal


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What Explains the Cross-

Country Dispersion?

Fundamentalsoutput, cash flow, leverage, concentration

Macro Policiesmonetary, exchange rate & Fiscal policies

Liquidity

MaturityIntegrityInsider trading, Disclosure/accounting


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Market Volatility vs. Output Volatility

VolatilityofStockMarketReturninUS

$

Volatility of Real GDP Growth Rate0 .02 .04 .06 .08

0

.1

.2

.3

NLD

AUT

COL

ITADEUDNK

FRA

BEL

EGY

GRC

LKA

IDN

NOR

USA

CHEAUS

ESPSWEJPN

PRT

GBRCAN

IND

ISR

CHL

KOR

ZAF

NZL

PAK

LUX

CHN

IRL

HKG

MYS

THA

NGA

SGP

PHL

FIN

SAU

MEX

TUR

HUNZWE

VEN

CZE

RUS

MAR

ARG

SVK

JOR

PER


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Role of Fundamentals

_____________________________________

V(GDP-growth)

1.15**(0.51)

1.70**(0.63)

1.72**(0.63)

Cash flow risk 0.028*(0.018)

0.025(0.018)

Leverageratio

0.020**(0.008)

0.019*(0.008)

Ent Billionairewealth/GDP

0.0001(0.0002)

Heir Billion.wealth/GDP

0.00003(0.00013)

#obs/ad.R2 54 / 0.17 39 / 0.46 39 / 0.45


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Market volatility vs. Inflation volatility


$

Volatility of Inflation Rate (ARG & PER dropped)0 50 100

0

.1

.2

.3

NZL

TWN

SAU

SVK

AUT

BEL

USANLD

JPNFRA

DNK

SGPDEU

MAR

CZEMYS

ZAF

EGY

CAN

ITA

THA

CHE

FINESP

LUX

KOR

GBR

NORIND

SWE

PRT

COLLKA

HUNGRCPHL

AUS

HKG

IRL

CHL

JOR

CHN

PAK

ZWE

IDN

TUR

NGAVEN

RUS

MEX

ISR


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Market volatility vs. Interest rate volatility


$

Volatility of Real Interest Rate (ARG & PER dropped)0 .5 1

0

.1

.2

.3

SVK

NLD

DEUCHEAUTJPN

USA

FIN

MYS

LUX

NOR

NZL

ITA

GBR

SWE

CAN

SGP

THA

HKGCZE

DNK

KOR

ESP

BEL

IND

IRL

PRT

FRA

PAK

GRC

MAR

COL

AUS

ZAF

HUNPHL

EGY

ZWE

CHN

JOR

IDN

CHLLKA

TUR

VENNGA

MEX

RUS

ISR

TWN


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Market Volatility vs. Fiscal Policy Volatility

VolatilityofStockMarketReturninUS$

Volatility of Fiscal Deficit/GDP0 2 4 6

0

.1

.2

.3

CHN

DEUCHEAUT

KOR

PAK

CAN

CZEIND

CHL

USANLD

ARG

IDN

ESP

PHL

TUR

FRAAUS

ZWE

MAR

LKA

JPN

COL

BELDNK

HUN

ISR

ZAF

NGA

PER

GBRNZL

ITA

THA

VEN

PRT

NOR

MYS

IRL

RUS

EGY

LUX

JOR

GRC

SWESGPFIN

MEX


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Adding Macro Policies

Inflation and exchange rate volatility addto stock market volatility

Fiscal deficit does not matter for volatilityVolatility of output growth and leverage

ratio continue to add to market volatility

Cash flow risk no longer significant


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Market Liquidity

and Market Maturity

Liquidity (ratio of market turnover to marketcapitalization) is insignificant.

Three proxies for maturity: market cap/GDP,age of the exchange and GDP per capita

A larger market cap/GDP or a higher GDP/capitais associated with a lower market volatility

Mkt cap/GDP becomes insignificant oncefundamentals/ macro policies are accounted for


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Market Volatility vs. Market Maturity


$

Market Capitalization/GDP (LUX dropped)0 50 100 150

0

.1

.2

.3RUS

IDN

CHNTUR

HUN

ARG

MAR

COL

VEN

PER

NGA

EGY

PAK

GRC

LKA

AUT

MEX

SVK

IND

ZWEPHL

ISR

THA

PRT

NORCZE

IRLITADEU

FRAESP

DNK

CHL

FIN

NZL JORBELSAU

NLD

CAN

AUSSWE

USA

MYS

CHE

GBR

SGP

HKG

JPN

ZAF


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Market Volatility vs. GDP per capita


$

Log of Per Capita GDP6 8 10

0

.1

.2

.3

IND PAKLKA

CHN

IDN

EGY

PHL

NGA

ZWE

MAR

THA

COL

PER

TUR

JOR

MYS

CHLZAF

MEX

HUN

SVK

KOR

VEN

RUS

CZE

ARG

PRTGRC

TWN

ESPIRLISR

NZL

HKG

SGP

SAUGBR

ITAAUSAUT

BEL

NLD

FINFRA

CANDNK

JPNSWE

USA

NOR

LUXCHE DEU


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Market Integrity

Insider trading

InformationDisclosure


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Variations in Insider

Trading Prohibition

Laws on the book

Corporate Insiders

Constructive Insiders

Tipees

Mis-appropriators

Enforcement of Existing

Laws/Regulations

Penalties for Violations

Civil Penalties

Criminal Penalties


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Insider Trading on market volatility

Allows fasterinformationrealization

Reduce noise in theprice

Reduce volatility

Improve efficiency

Insiders can benefitfrom volatility

May choose riskierprojects

May manipulate thetiming/content of

information releaseIncrease volatility

Reduce efficiency


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Previous empirical work

Legal trading by corporate insiders

-- only legal trades

-- single country studies (US and UK)

Illegal inside trading as uncovered by the

regulators-- single country study (US)

-- possible selection bias


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Measuring Market Integrity

Insider trading

Laws on the book

Actual Prosecution

Survey of firmexecutives on theprevalence of insidertrading (GCR)

Extent of corruption(ICRG)

Information

Accounting QualityDisclosure


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Insider Trading Index

Subjective index from GCR survey of firmsin 53 countries. One of the questions

(Q3.13) asked respondents to rate on a 1-7 how common insider trading is in thedomestic stock market

Average of all respondents for a givencountry is used as the value of the insidertrading index for that country


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Market Volatility vs. Insider Trading

VolatilityofStockMar

ketReturninUS

$

Insider Trading Index0 1 2 3

0

.1

.2

.3

DEUDNK

GBR

IRLSGP

NZLLUXSWE

CHEAUSFIN

USA

JPN

CANBEL

AUTFRA

NOR

NLD

CHL

PRT

ESP

HKG

TUR

ISR

ARG

HUN

COL

ZWE

ITA

ZAF

EGY

PER

KORMYS

JOR

GRC

MEXTWN

IND

RUS

IDN

PHL

CHN

THA

SVK

VEN

CZE


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Table 2: Insider Trading &Market VolatilityDependent Variable: Volatility of Stock Returns (in US Dollars)

Specification OLS OLS OLS OLS IV IV

Insider Trading Index 0.035** 0.017* 0.015# 0.076** 0.052**

(0.006) (0.010) (0.010) (0.030) (0.023)

Volatility of Real 1.471** 1.163* 1.202** 0.488 0.715

GDP Growth Rate (0.538) (0.579) (0.583) (0.601) (0.494)

Log Per Capita GDP -0.007 -0.007 0.021 0.011

(0.007) (0.008) (0.015) (0.012)

Market Capitalization/GDP -0.005 0.001 -0.017

(0.004) (0.098) (0.021)

R-squared 0.24 0.36 0.48 0.48 - -

No. of Obs. 52 48 47 46 46 45


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Table 4: Adding Volatility of Macro Policies (IV)Dependent Variable: Volatility of Stock Returns (in US Dollars)

Insider Trading Index 0.067** 0.063** 0.058** 0.058**

(0.024) (0.027) (0.022) (0.024)

Volatility of Real 0.292 0.326 0.377 0.385

GDP Growth Rate (0.657) (0.667) (0.619) (0.633)

Volatility of Inflation Rate 0.003** 0.005 0.003* 0.009(0.002) (0.054) (0.002) (0.052)

Volatility of Fiscal Def./GDP 0.001 0.001 0.001 0.001

(0.005) (0.005) (0.005) (0.005)

Log Per Capita GDP 0.016 0.015 0.014 0.013

(0.012) (0.013) (0.011) (0.012)

Market Capitalization/GDP 0.001 -0.011 -0.013 -0.012

(0.009) (0.023) (0.022) (0.023)

No. of Obs. 44 41 43 41


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An Example

US(1)

China(2)

Difference(3)=(2)-(1)

Increase inmkt Volatility

InsiderTrading 2.62 4.62 2.00 245 bp

OutputVolatility 1.7% 3.0% 1.3%

103 bp

More volatility effectfrom an in insider

trading

>The volatility effect from an in output volatility


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To Conclude

Lack of market integrity contributes tomarket volatility

The effect is quantitatively large relativeto the effects of economic and policy

fundamentals


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insider trading 9-22-04

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