IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v34y2010i9p2110-2120.html
   My bibliography  Save this article

Detecting insider trading: The theory and validation in Korea Exchange

Author

Listed:
  • Park, Young S.
  • Lee, Jaehyun

Abstract

This paper provides an empirical basis for identifying insider transactions by deriving a theoretical model, which incorporates the relationship between insider transactions and time series of stock returns. Thus, this model enables us detecting insider transactions by applying stock return time series. We show that when there is an insider transaction in the market, time series can be derived as an ARMA(1,1) process having closed solution coefficients. For validation of the model, we test publicly released insider transactions and reverse takeover events using the minute-by-minute stock price data. The selected events show higher pass rate of the detection criteria than the current detection system which shows that our model produces smaller Type II error than the existing post transaction-based cumulative abnormal return model.

Suggested Citation

  • Park, Young S. & Lee, Jaehyun, 2010. "Detecting insider trading: The theory and validation in Korea Exchange," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2110-2120, September.
  • Handle: RePEc:eee:jbfina:v:34:y:2010:i:9:p:2110-2120
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00057-9
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tarun Chordia & Richard Roll & Avanidhar Subrahmanyam, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, April.
    2. Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, vol. 16(2), pages 189-212, June.
    3. Daher, Wassim & Mirman, Leonard J., 2007. "Market structure and insider trading," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 306-331.
    4. Wang, Leonard F.S. & Wang, Ya-Chin & Ren, Shuang, 2009. "Stackelberg financial-leader in insider trading model," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 123-131, January.
    5. Harris, Richard D.F. & Yilmaz, Fatih, 2009. "A momentum trading strategy based on the low frequency component of the exchange rate," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1575-1585, September.
    6. Meulbroek, Lisa K, 1992. "An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-1699, December.
    7. Daher, Wassim & Mirman, Leonard J., 2006. "Cournot duopoly and insider trading with two insiders," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(4), pages 530-551, September.
    8. Szakmary, Andrew C. & Shen, Qian & Sharma, Subhash C., 2010. "Trend-following trading strategies in commodity futures: A re-examination," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 409-426, February.
    9. Huddart, Steven & Hughes, John S & Levine, Carolyn B, 2001. "Public Disclosure and Dissimulation of Insider Trades," Econometrica, Econometric Society, vol. 69(3), pages 665-681, May.
    10. Lee, Yi-Tsung & Liu, Yu-Jane & Roll, Richard & Subrahmanyam, Avanidhar, 2004. "Order Imbalances and Market Efficiency: Evidence from the Taiwan Stock Exchange," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(2), pages 327-341, June.
    11. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
    12. Brockman, Paul & Yan, Xuemin (Sterling), 2009. "Block ownership and firm-specific information," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 308-316, February.
    13. Gosnell, Thomas & Keown, Arthur J & Pinkerton, John M, 1992. "Bankruptcy and Insider Trading: Differences between Exchange-Listed and OTC Firms," Journal of Finance, American Finance Association, vol. 47(1), pages 349-362, March.
    14. Markus K. Brunnermeier, 2005. "Information Leakage and Market Efficiency," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 417-457.
    15. Aktas, Nihat & de Bodt, Eric & Van Oppens, Hervé, 2008. "Legal insider trading and market efficiency," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1379-1392, July.
    16. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    17. Seyhun, H Nejat & Bradley, Michael, 1997. "Corporate Bankruptcy and Insider Trading," The Journal of Business, University of Chicago Press, vol. 70(2), pages 189-216, April.
    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. Olmo, Jose & Pilbeam, Keith & Pouliot, William, 2011. "Detecting the presence of insider trading via structural break tests," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2820-2828, November.
    2. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Detecting informed activities in European-style option tradings," Papers 1403.3294, arXiv.org.
    3. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Finding informed traders in futures and their inderlying assets in intraday trading," Papers 1402.6583, arXiv.org.
    4. de Bonviller, Simon & Zuo, Alec & Wheeler, Sarah Ann, 2019. "Is there evidence of insider trading in Australian water markets?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 60(2), April.
    5. James, Robert & Leung, Henry & Prokhorov, Artem, 2023. "A machine learning attack on illegal trading," Journal of Banking & Finance, Elsevier, vol. 148(C).
    6. Ryu, Doojin & Yang, Heejin & Yu, Jinyoung, 2022. "Insider trading and information asymmetry: Evidence from the Korea Exchange," Emerging Markets Review, Elsevier, vol. 51(PA).
    7. Mazza, Paolo & Ruh, Benjamin, 2022. "The performance of corporate legal insider trading in the Korean market," International Review of Law and Economics, Elsevier, vol. 71(C).
    8. Cline, Brandon N. & Posylnaya, Valeriya V., 2019. "Illegal insider trading: Commission and SEC detection," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 247-269.

    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. Qin Lei & Xuewu Wang, 2014. "Time†Varying Liquidity Trading, Private Information and Insider Trading," European Financial Management, European Financial Management Association, vol. 20(2), pages 321-351, March.
    2. Luke M. Bennett & Wei Hu, 2023. "Filtration enlargement‐based time series forecast in view of insider trading," Journal of Economic Surveys, Wiley Blackwell, vol. 37(1), pages 112-140, February.
    3. Laurel Franzen & Xu Li & Oktay Urcan & Mark E. Vargus, 2014. "The Market Response To Insider Sales Of Restricted Stock Versus Unrestricted Stock," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 37(1), pages 99-118, February.
    4. Semih Tartaroglu & Michael Imhof, 2017. "Insider trading and response to earnings announcements: the impact of accelerated disclosure requirements," Review of Quantitative Finance and Accounting, Springer, vol. 49(2), pages 315-336, August.
    5. Harjeet S. Bhabra & Ashrafee T. Hossain, 2015. "Market conditions, governance and the information content of insider trades," Review of Financial Economics, John Wiley & Sons, vol. 24(1), pages 1-11, January.
    6. Tirapat, Sunti & Visaltanachoti, Nuttawat, 2013. "Opportunistic insider trading," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1046-1061.
    7. Guanming He & Helen Mengbing Ren & Richard Taffler, 2021. "Do corporate insiders trade on future stock price crash risk?," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1561-1591, May.
    8. Agrawal, Anup & Nasser, Tareque, 2012. "Insider trading in takeover targets," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 598-625.
    9. Dean Katselas, 2020. "Strategic insider trading around earnings announcements in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3709-3741, December.
    10. Bhabra, Harjeet S. & Hossain, Ashrafee T., 2015. "Market conditions, governance and the information content of insider trades," Review of Financial Economics, Elsevier, vol. 24(C), pages 1-11.
    11. Hans Degryse & Frank Jong & Jérémie Lefebvre, 2014. "An Empirical Analysis of Legal Insider Trading in The Netherlands," De Economist, Springer, vol. 162(1), pages 71-103, March.
    12. Wisniewski, Tomasz P. & Bohl, Martin T., 2005. "The Information Content of Registered Insider Trading Under Lax Law Enforcement," International Review of Law and Economics, Elsevier, vol. 25(2), pages 169-185, June.
    13. Wang, Kun Tracy & Wang, Wanbin Walter, 2017. "Competition in the stock market with asymmetric information," Economic Modelling, Elsevier, vol. 61(C), pages 40-49.
    14. Van Geyt, Debby & Van Cauwenberge, Philippe & Vander Bauwhede, Heidi, 2014. "Does high-quality corporate communication reduce insider trading profitability?," International Review of Law and Economics, Elsevier, vol. 37(C), pages 1-14.
    15. Sadok El Ghoul & Omrane Guedhami & Robert Nash & He (Helen) Wang, 2022. "Economic policy uncertainty and insider trading," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(4), pages 817-854, December.
    16. Skaife, Hollis A. & Veenman, David & Wangerin, Daniel, 2013. "Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 91-110.
    17. Daher, Wassim & Karam, Fida & Mirman, Leonard J., 2012. "Insider trading with different market structures," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 143-154.
    18. Karam, Fida & Daher, Wassim, 2013. "Insider trading in a two-tier real market structure model," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 44-52.
    19. Chang, Millicent & Watson, Iain, 2015. "Delayed disclosure of insider trades: Incentives for and indicators of future performance?," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 182-197.
    20. Wassim Daher & Harun Aydilek & Fida Karam & Asiye Aydilek, 2014. "Insider trading with product differentiation," Journal of Economics, Springer, vol. 111(2), pages 173-201, March.

    More about this item

    Keywords

    Insider trading Surveillance ARMA;

    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:eee:jbfina:v:34:y:2010:i:9:p:2110-2120. 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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    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.