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The Journal of Alternative Investments

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Article

The Decline of Informed Trading in the Equity and Options Markets

Charles Cao, David Gempesaw and Timothy Simin
The Journal of Alternative Investments Fall 2018, jai.2018.1.064; DOI: https://doi.org/10.3905/jai.2018.1.064
Charles Cao
is the Smeal Chair Professor of Finance at Smeal College of Business at Pennsylvania State University in University Park, PA
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David Gempesaw
is a doctoral student at Smeal College of Business at Pennsylvania State University in University Park, PA
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Timothy Simin
is an associate professor of finance and Smeal Research Fellow at Smeal College of Business at Pennsylvania State University in University Park, PA
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Abstract

Reliable excess returns from active portfolio management derive from informed trading. This article investigates the information content of informed trading in the equity market and the options market. The authors find that informed equity trading and options trading are positively correlated in the time series but virtually uncorrelated cross sectionally. Portfolio-level and stock-level analyses provide robust evidence that the cross-sectional return predictive power of informed trading in each market is distinct. Time-series analyses indicate that aggregate informed options trading is useful for predicting market returns but that the amount of informed trading has declined significantly in more recent years. The time-series patterns of both informed trading measures coincide closely with the decline in equity hedge fund excess returns.

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The Journal of Alternative Investments: 23 (3)
The Journal of Alternative Investments
Vol. 23, Issue 3
Winter 2021
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The Decline of Informed Trading in the Equity and Options Markets
Charles Cao, David Gempesaw, Timothy Simin
The Journal of Alternative Investments Aug 2018, jai.2018.1.064; DOI: 10.3905/jai.2018.1.064

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The Decline of Informed Trading in the Equity and Options Markets
Charles Cao, David Gempesaw, Timothy Simin
The Journal of Alternative Investments Aug 2018, jai.2018.1.064; DOI: 10.3905/jai.2018.1.064
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  • Article
    • Abstract
    • DATA
    • CROSS-SECTIONAL PREDICTABILITY
    • INFORMED TRADING MEASURES IN THE CROSS SECTION
    • TIME-SERIES PREDICTABILITY
    • THE VALUE OF INFORMED TRADING OVER TIME
    • CONCLUSION
    • ACKNOWLEDGMENT
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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Show more Article
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