City Research Online

Abstract

The occurrence of abnormal returns before unscheduled announcements is usually identified with informed price movements. Therefore, the detection of these observations beyond the range of returns due to the normal day-to-day activity of financial markets is a concern for regulators monitoring the right functioning of financial markets and for investors concerned about their investment portfolios. In this article we introduce a novel method to detect informed price movements via structural break tests for the intercept of an extended CAPM model describing the risk premium of financial returns. These tests are based on the use of a U-statistic type process that is sensitive to detecting changes in the intercept that occur very early in the evaluation period and that can be used to construct a consistent estimator of the timing of the change. As a byproduct, we show that estimators of the timing of change constructed from standard CUSUM statistics are inconsistent and therefore fail to provide useful information about the presence of informed price movements.

Publication Type:	Monograph (Discussion Paper)
Additional Information:	© 2009 the authors
Publisher Keywords:	CUSUM tests; ECAPM; Informed Price Movements; Insider Trading; Linear Regression Models; Structural Change; U-statistics
Subjects:	H Social Sciences > HB Economic Theory
Departments:	School of Policy & Global Affairs > Economics > Discussion Paper Series
SWORD Depositor:	Symplectic Administrator

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