Strategic trading in the wrong direction by a large institutional insider

Erasmo Giambona, Joseph Golec

Research output: Contribution to journalArticle

6 Scopus citations

Abstract

Many theoretical papers suggest that large informed traders should make misleading or random trades to disguise their trading. Alternatively, informed traders may trade purely on their estimate of stock value. This paper examines the trading behavior of a large institutional insider that periodically trades in the wrong direction, i.e., makes occasional sell (buy) trades within packages of buy (sell) trades. Using a hand-collected data set, we find that three quarters of the trade packages include wrong-direction trades. Wrong trades appear to be used mostly to disguise right-direction trades. We find that the wrong-trade stocks are larger and have less noisy returns, hence, they lack natural disguise. Wrong trades are relatively small, used to accentuate return volatility, distributed evenly during a package of trades, and are not consistently profitable.

Original languageEnglish (US)
Pages (from-to)1-22
Number of pages22
JournalJournal of Empirical Finance
Volume17
Issue number1
DOIs
StatePublished - Jan 1 2010
Externally publishedYes

Keywords

  • Insider
  • Institutional investor
  • Manipulation
  • Strategic trading

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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