Exploiting Insider Trading Sequences

Are there certain kinds of insider trades that are more exploitable than others? In their August 2012 paper entitled “Insider Trading Patterns”, David Cicero and Babajide Wintoki define and examine two kinds of insider trading: (1) isolated trades (no trades in prior or subsequent months; and, (2) sequenced trades (occurring in successive months). They hypothesize that when insiders have short-maturity (long-maturity) information, they tend toward isolated (sequenced) trading. They measure insider trading informativeness via post-trade abnormal returns to associated stocks, calculated relative to returns for matched stocks with no insider trading or via adjustment based on a four-factor (market, size, book-to-market, momentum) model of stock returns. Using a broad sample of insider trades in U.S. stocks aggregated monthly by insider, along with associated stock prices and firm characteristics, during January 1986 through December 2011, they find that: (more…)