Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental information revelation in the credit default swap (CDS) mar-ket under circumstances consistent with the use of non-public information by informed banks. Specifically, the information revelation occurs only for negative credit news and for entities that subsequently experience adverse shocks. Moreover the degree of advance information revelation increases with the number of banks that have lend-ing/monitoring relations with a given firm, and this effect is robust to controls for non-informational trade. We find no evidence, however, that the degree of asymmetric information adversely affects prices or liquidity in either the equity or credit markets. If anything, with regard to liquidity, the reverse appears to be true.

Deviations from no-arbitrage relations should be related to market liquidity, because liquidity facilitates arbitrage. Further, a wide futures/cash basis may trigger arbitrage trades and affect liquidity. We test these ideas by studying the dynamic relation between stock market liquidity and the index futures basis. Liquidity and the basis forecast each other in addition to being contemporaneously correlated. There is evidence of two-way Granger causality between the short-term absolute basis and liquidity, and liquidity Granger-causes longer-term absolute bases. Shocks to the absolute basis predict future stock market liquidity. The evidence suggests that liquidity enhances the efficiency of the futures/cash pricing system.

on New Financial Market Structures, and the Federal Reserve Bank of New York, for helpful comments. The views stated here are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York, or the Federal Reserve The Microstructure of Cross-Autocorrelations This paper examines the specific mechanism by which the incorporation of information into prices leads to cross-autocorrelations in stock returns. We develop a model where trading on private information occurs first in the large stocks and is transmitted to small stocks with a lag. Such trading reduces large stock liquidity, so that, in equilibrium, greater large stock illiquidity portends stronger cross-autocorrelations. Empirically, we find that the lead-lag relation between large and small stocks increases with lagged spreads of large stocks. Further, order flows in large stocks significantly predict returns of small stocks when large stock spreads are high, at both the market and industry levels. In addition, the role of order flow and liquidity in predicting small stock returns is stronger prior to macro announcements (when information-based trading is more likely)

This paper examines the impact of accounting information events (i.e., earnings announcements and analysts ’ earnings forecasts) on the profitability of a pairs trading strategy proposed by Gatev et al. (2006). Using a portfolio of U.S. stock pairs between 1981 and 2006, we find that pairs trades are frequently triggered around accounting information events. More importantly, we find that pairs positions opened after accounting events are significantly less profitable than pairs positions opened in non-event periods. Furthermore, we find that incremental excess returns can be achieved by delaying the closing of a pairs position until after accounting information events. Overall, our results suggest that drift in stock prices following earnings announcements and analysts ’ earnings forecasts is a significant factor affecting the profitability of pairs trades. JEL Classification: G12; G14; M41 This paper studies the impact of accounting information events (such as earnings announcements and analysts ’ earnings forecasts) on the profitability of pairs trading. Pairs trading is an active investment strategy that attempts to profit from relative pricing errors of a pair of “similar ” securities. In the case of equities, the strategy sells a stock that has had a relative

Using the degree of accessibility of foreign investors to emerging stock markets, or investibility, as a proxy for the extent of foreign investments, we assess whether investibility has a significant influence on the diffusion of global market information across stocks in emerging markets. We show that greater investibility reduces price delay to global market information where the price delay is measured as the proportion of stock returns explained by the lagged world market returns in the regression of stock returns on contemporaneous and lagged world and local market returns. We also find that returns of highly investible stocks lead returns of non-investible stocks, but not vice versa. These results are consistent with the idea that financial liberalization in the form of greater investibility yields informationally more efficient

This paper documents strong evidence of intra-industry return reversals. A contrarian strategy of buying loser stocks and selling winner stocks based on relative performance within the industry generates a significant return of 1.5 percent per month. These intra-industry return reversals are different from the unconditional contrarian profits in several ways. The intraindustry reversals are robust to adjustments to market microstructure biases and more pervasive across stocks that differ by market capitalization, liquidity and idiosyncratic volatility. We show that extreme past stock performance that are not relative industry losers and winners do not exhibit short-term reversals, but exhibit significant return momentum. We also find that the intraindustry reversal is independent of the across-industry momentum. A simple zero-investment trading strategy that capitalizes on both the intra-industry reversals and across-industry momentum produces a large 2.3 percent return per month. While the intra-industry reversals are less likely to be due to investor overreaction to firm-specific information, our evidence points to differences in liquidity level, and exposure to liquidity shocks as the likely source of the reversals.

helpful discussion. All errors are our own. Using the degree of accessibility of foreign investors to emerging stock markets, or investibility, as a proxy to measure the severity of market frictions in affecting stocks in local markets, we assess whether investibility has a significant influence on the lead-lag relation of stock returns in emerging markets, and whether this is due to slow diffusion of common information across stocks. We show that returns of highly-investable stocks that allow large access of foreign investment lead returns of non-investable stocks that are closed to foreign investors, but not vice versa. Moreover, this lead-lag effect is not driven by other known determinants such as size, trading volume, or analyst coverage, nor is it due to intra-industry leader-follower effect. These patterns arise because prices of highly-investable stocks adjust faster to market-wide information. Greater investibility reduces the delay with which individual stock prices respond to the global and local market information. The results are consistent with the idea that financial liberalization in the form of greater investibility yields more informationally efficient stock prices in emerging markets.