IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v79y2024i2p903-948.html
   My bibliography  Save this article

Informed Trading Intensity

Author

Listed:
  • VINCENT BOGOUSSLAVSKY
  • VYACHESLAV FOS
  • DMITRIY MURAVYEV

Abstract

We train a machine learning method on a class of informed trades to develop a new measure of informed trading, informed trading intensity (ITI). ITI increases before earnings, mergers and acquisitions, and news announcements, and has implications for return reversal and asset pricing. ITI is effective because it captures nonlinearities and interactions between informed trading, volume, and volatility. This data‐driven approach can shed light on the economics of informed trading, including impatient informed trading, commonality in informed trading, and models of informed trading. Overall, learning from informed trading data can generate an effective informed trading measure.

Suggested Citation

  • Vincent Bogousslavsky & Vyacheslav Fos & Dmitriy Muravyev, 2024. "Informed Trading Intensity," Journal of Finance, American Finance Association, vol. 79(2), pages 903-948, April.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:2:p:903-948
    DOI: 10.1111/jofi.13320
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jofi.13320
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jofi.13320?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
    2. Hasbrouck, Joel, 1991. "Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    3. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    4. Alldredge, Dallin M. & Cicero, David C., 2015. "Attentive insider trading," Journal of Financial Economics, Elsevier, vol. 115(1), pages 84-101.
    5. David Easley & Marcos López de Prado & Maureen O’Hara & Zhibai Zhang & Wei Jiang, 2021. "Microstructure in the Machine Age [The risk of machine learning]," The Review of Financial Studies, Society for Financial Studies, vol. 34(7), pages 3316-3363.
    6. Pierre Collin‐Dufresne & Vyacheslav Fos, 2016. "Insider Trading, Stochastic Liquidity, and Equilibrium Prices," Econometrica, Econometric Society, vol. 84(4), pages 1441-1475, July.
    7. Bryan Kelly & Alexander Ljungqvist, 2012. "Testing Asymmetric-Information Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1366-1413.
    8. Odders-White, Elizabeth R. & Ready, Mark J., 2008. "The probability and magnitude of information events," Journal of Financial Economics, Elsevier, vol. 87(1), pages 227-248, January.
    9. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    10. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 905-939.
    11. Alon Brav & Wei Jiang & Frank Partnoy & Randall Thomas, 2008. "Hedge Fund Activism, Corporate Governance, and Firm Performance," Journal of Finance, American Finance Association, vol. 63(4), pages 1729-1775, August.
    12. Yang, Yung Chiang & Zhang, Bohui & Zhang, Chu, 2020. "Is information risk priced? Evidence from abnormal idiosyncratic volatility," Journal of Financial Economics, Elsevier, vol. 135(2), pages 528-554.
    13. Erkko Etula & Kalle Rinne & Matti Suominen & Lauri Vaittinen, 2020. "Dash for Cash: Monthly Market Impact of Institutional Liquidity Needs," The Review of Financial Studies, Society for Financial Studies, vol. 33(1), pages 75-111.
    14. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    15. Lauren Cohen & Christopher Malloy & Lukasz Pomorski, 2012. "Decoding Inside Information," Journal of Finance, American Finance Association, vol. 67(3), pages 1009-1043, June.
    16. Leslie A. Jeng & Andrew Metrick & Richard Zeckhauser, 2003. "Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 453-471, May.
    17. Cookson, J. Anthony & Fos, Vyacheslav & Niessner, Marina, 2021. "Does Disagreement Facilitate Informed Trading? Evidence from Activist Investors," SocArXiv q8xvc, Center for Open Science.
    18. Pierre Collin-Dufresne & Vyacheslav Fos, 2015. "Do Prices Reveal the Presence of Informed Trading?," Journal of Finance, American Finance Association, vol. 70(4), pages 1555-1582, August.
    19. Peter Cziraki & Jasmin Gider, 2021. "The Dollar Profits to Insider Trading [Information networks: evidence from illegal insider trading tips]," Review of Finance, European Finance Association, vol. 25(5), pages 1547-1580.
    20. Shihao Gu & Bryan Kelly & Dacheng Xiu, 2020. "Empirical Asset Pricing via Machine Learning," The Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 2223-2273.
    21. Stefan Nagel, 2012. "Evaporating Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2005-2039.
    22. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
    23. Pierre Collin‐Dufresne & Vyacheslav Fos, 2016. "Insider Trading, Stochastic Liquidity, and Equilibrium Prices," Econometrica, Econometric Society, vol. 84, pages 1441-1475, July.
    24. Duarte, Jefferson & Hu, Edwin & Young, Lance, 2020. "A comparison of some structural models of private information arrival," Journal of Financial Economics, Elsevier, vol. 135(3), pages 795-815.
    25. Ron Kaniel & Hong Liu, 2006. "So What Orders Do Informed Traders Use?," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1867-1914, July.
    26. Patrick Augustin & Marti G. Subrahmanyam, 2020. "Informed Options Trading Before Corporate Events," Annual Review of Financial Economics, Annual Reviews, vol. 12(1), pages 327-355, December.
    27. RenÈ Caldentey & Ennio Stacchetti, 2010. "Insider Trading With a Random Deadline," Econometrica, Econometric Society, vol. 78(1), pages 245-283, January.
    28. Holderness, Clifford G. & Sheehan, Dennis P., 1985. "Raiders or saviors? The evidence on six controversial investors," Journal of Financial Economics, Elsevier, vol. 14(4), pages 555-555, December.
    29. Richard Lambert & Christian Leuz & Robert E. Verrecchia, 2007. "Accounting Information, Disclosure, and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 385-420, May.
    30. Kraus, Alan & Stoll, Hans R, 1972. "Price Impacts of Block Trading on the New York Stock Exchange," Journal of Finance, American Finance Association, vol. 27(3), pages 569-588, June.
    31. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    32. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, April.
    33. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    34. Chan, Louis K. C. & Lakonishok, Josef, 1993. "Institutional trades and intraday stock price behavior," Journal of Financial Economics, Elsevier, vol. 33(2), pages 173-199, April.
    35. Nickolay Gantchev & Chotibhak Jotikasthira, 2018. "Institutional Trading and Hedge Fund Activism," Management Science, INFORMS, vol. 64(6), pages 2930-2950, June.
    36. Easley, David & O'Hara, Maureen, 1992. "Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
    37. Campbell, John Y. & Ramadorai, Tarun & Schwartz, Allie, 2009. "Caught on tape: Institutional trading, stock returns, and earnings announcements," Journal of Financial Economics, Elsevier, vol. 92(1), pages 66-91, April.
    38. Collin-Dufresne, Pierre & Fos, Vyacheslav & Muravyev, Dmitry, 2021. "Informed Trading in the Stock Market and Option-Price Discovery," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(6), pages 1945-1984, September.
    39. Shihao Gu & Bryan Kelly & Dacheng Xiu, 2020. "Empirical Asset Pricing via Machine Learning," Review of Finance, European Finance Association, vol. 33(5), pages 2223-2273.
    40. Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-374.
    41. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1005-1047.
    42. April Klein & Emanuel Zur, 2009. "Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors," Journal of Finance, American Finance Association, vol. 64(1), pages 187-229, February.
    43. Akey, Pat & Grégoire, Vincent & Martineau, Charles, 2022. "Price revelation from insider trading: Evidence from hacked earnings news," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1162-1184.
    44. Marcin Kacperczyk & Emiliano S Pagnotta, 2019. "Chasing Private Information," The Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4997-5047.
    45. Biggerstaff, Lee & Cicero, David & Wintoki, M. Babajide, 2020. "Insider trading patterns," Journal of Corporate Finance, Elsevier, vol. 64(C).
    46. David Easley & Marcos López de Prado & Maureen O’Hara & Zhibai Zhang, 2021. "Microstructure in the Machine Age," NBER Chapters, in: Big Data: Long-Term Implications for Financial Markets and Firms, pages 3316-3363, National Bureau of Economic Research, Inc.
    47. Hasbrouck, Joel, 1988. "Trades, quotes, inventories, and information," Journal of Financial Economics, Elsevier, vol. 22(2), pages 229-252, December.
    48. Kerry Back & Kevin Crotty & Tao Li, 2018. "Identifying Information Asymmetry in Securities Markets," The Review of Financial Studies, Society for Financial Studies, vol. 31(6), pages 2277-2325.
    49. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2010. "O/S: The relative trading activity in options and stock," Journal of Financial Economics, Elsevier, vol. 96(1), pages 1-17, April.
    50. Ferhat Akbas & Chao Jiang & Paul D. Koch, 2020. "Insider Investment Horizon," Journal of Finance, American Finance Association, vol. 75(3), pages 1579-1627, June.
    51. Mohammadreza Bolandnazar & Robert J. Jackson & Wei Jiang & Joshua Mitts, 2020. "Trading Against the Random Expiration of Private Information: A Natural Experiment," Journal of Finance, American Finance Association, vol. 75(1), pages 5-44, February.
    52. Easley, David, et al, 1996. "Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
    53. Patrick Augustin & Menachem Brenner & Marti G. Subrahmanyam, 2019. "Informed Options Trading Prior to Takeover Announcements: Insider Trading?," Management Science, INFORMS, vol. 65(12), pages 5697-5720, December.
    54. Shumway, Tyler, 1997. "The Delisting Bias in CRSP Data," Journal of Finance, American Finance Association, vol. 52(1), pages 327-340, March.
    55. Pierre Collin-Dufresne & Vyacheslav Fos, 2013. "Do Prices Reveal the Presence of Informed Trading?," Swiss Finance Institute Research Paper Series 13-69, Swiss Finance Institute, revised Sep 2015.
    56. Jacob Boudoukh & Ronen Feldman & Shimon Kogan & Matthew Richardson, 2019. "Information, Trading, and Volatility: Evidence from Firm-Specific News," The Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 992-1033.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rahman, Sohanur & Sinnewe, Elisabeth & Chapple, Larelle, 2024. "Environment-specific political risk discourse and expected crash risk: The role of political activism," International Review of Financial Analysis, Elsevier, vol. 95(PB).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Akey, Pat & Grégoire, Vincent & Martineau, Charles, 2022. "Price revelation from insider trading: Evidence from hacked earnings news," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1162-1184.
    2. Travis L. Johnson & Eric C. So, 2018. "A Simple Multimarket Measure of Information Asymmetry," Management Science, INFORMS, vol. 64(3), pages 1055-1080, March.
    3. Lof, Matthijs & van Bommel, Jos, 2023. "Asymmetric information and the distribution of trading volume," Journal of Corporate Finance, Elsevier, vol. 82(C).
    4. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    5. Duarte, Jefferson & Hu, Edwin & Young, Lance, 2020. "A comparison of some structural models of private information arrival," Journal of Financial Economics, Elsevier, vol. 135(3), pages 795-815.
    6. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017, January-A.
    7. repec:uts:finphd:34 is not listed on IDEAS
    8. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity -- Theory and Empirical Evidence," NBER Working Papers 18251, National Bureau of Economic Research, Inc.
    9. Rzayev, Khaladdin & Ibikunle, Gbenga, 2019. "A state-space modeling of the information content of trading volume," Journal of Financial Markets, Elsevier, vol. 46(C).
    10. Goodhart, Charles A. E. & O'Hara, Maureen, 1997. "High frequency data in financial markets: Issues and applications," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 73-114, June.
    11. Contreras, Harold & Marcet, Francisco, 2021. "Sell-side analyst heterogeneity and insider trading," Journal of Corporate Finance, Elsevier, vol. 66(C).
    12. Peress, Joel & Schmidt, Daniel, 2021. "Noise traders incarnate: Describing a realistic noise trading process," Journal of Financial Markets, Elsevier, vol. 54(C).
    13. Jan Hanousek & Hoje Jo & Christos Pantzalis & Jung Chul Park, 2023. "A Dilemma of Self-interest vs. Ethical Responsibilities in Political Insider Trading," Journal of Business Ethics, Springer, vol. 187(1), pages 137-167, September.
    14. Lei, Qin & Wu, Guojun, 2005. "Time-varying informed and uninformed trading activities," Journal of Financial Markets, Elsevier, vol. 8(2), pages 153-181, May.
    15. Haghighi, Afshin & Zhang, Lei & Oliver, Barry & Faff, Robert, 2023. "Information acquisition and market liquidity: Evidence from EDGAR search activity," Global Finance Journal, Elsevier, vol. 57(C).
    16. Simon Gervais & Ron Kaniel & Dan H. Mingelgrin, 2001. "The High‐Volume Return Premium," Journal of Finance, American Finance Association, vol. 56(3), pages 877-919, June.
    17. Pierre Collin-Dufresne & Vyacheslav Fos, 2012. "Do prices reveal the presence of informed trading?," NBER Working Papers 18452, National Bureau of Economic Research, Inc.
    18. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4, July-Dece.
    19. Xinyue He & Teresa Serra & Philip Garcia, 2021. "Resilience in “Flash Events” in the Corn and Lean Hog Futures Markets," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(2), pages 743-764, March.
    20. Thanh Huong Nguyen, 2019. "Information and Noise in Stock Markets: Evidence on the Determinants and Effects Using New Empirical Measures," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 7-2019, January-A.
    21. Acheson, Graeme G. & Coyle, Christopher & Turner, John D., 2018. "Prices and informed trading: Evidence from an early stock market," QUCEH Working Paper Series 2018-05, Queen's University Belfast, Queen's University Centre for Economic History.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:79:y:2024:i:2:p:903-948. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/afaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.