Trading strategies based on insider trade disclosures

Abstract

Insider trades have been proven to be informative in exchanges like NYSE and Nasdaq. There is a huge demand for insider information in US and European markets. There are data vendors who uses insider trade to predict stock movements and formulate working strategies which generate positive returns. For instance, Investment publishes a journal, “Insiders’ Chronicles” which offers a concise list of insider trade disclosures along with recommendations. The hypothesis is based on the fact that insiders would know the state of the company and future growth opportunities. This would enable insiders to predict stock movements better than a regular investor. If this is the case, it could also be possible for an investor to mimic the insider and generate more than normal returns on a stock. This has been the topic of many studies around the informative value of insider trade information. There do not seem to be similar studies undertaken in the Indian context. This study aims to determine whether insider trade disclosures are informative and formulate simple trading strategies in the Indian context. In India, where there are a lot of promoter driven companies, this study could lead to interesting insights on the value of insider information. This study analyses insider trades reported to the Bombay Stock Exchange from 2006 to 2014 and attempts to make positive returns based on the information contained in insider trade disclosures