Does Insider Trading Raise Market Volatility?

Abstract

This paper studies the role of insider trading in explaining cross-country differences in stock market volatility. It introduces a new measure of insider trading for 50 or so countries. The central finding is that countries with more prevalent insider trading do have more volatile stock markets, even after one controls for liquidity/maturity of the market, and the volatility of the underlying fundamentals (volatility of real output and monetary and fiscal policies). Moreover, the effect of insider trading is quantitatively significant when compared with the effect of economic fundamentals.