Adverse Selection : The Effect of Short-Term Adverse Selection on the Swedish Stock Market

Abstract: This paper aims to analyze the phenomenon of adverse selection of its presence and potential short-term impact on the Swedish stock market. Adverse selection refers to a situation where information asymmetry among market participants might lead to potential imbalances in information and unfairness among all market participants. The primary objective of this paper is to determine and analyze the potential existence of adverse selection and to explore its effects on the short-term trading volume before announcements.  This study's research design and approach are through data collection, to analyze the relationship between traded volume and disclosures. Five highly traded stocks, Atlas Copco AB, Evolution AB, Swedbank AB, Hexagon AB and AB Volvo are selected for the analysis, representing different sectors. A historical data analysis method and event studies are being used to identify abnormal fluctuations in trading volume before announcements. Data on volume and stock prices are collected over one year, between 11 May 2022 - 11 May 2023. By utilizing various statistical methods and econometric techniques, abnormal volume fluctuations before announcements could be measured and analyzed.  This paper concludes the existence of short-term adverse selection on the Swedish stock market cannot confidently be determined considering this analysis only, as indicated by nonsignificant abnormal fluctuations in the short-term trading volume before announcements. However, the results of the data collection in the period between 11 May 2022 - 11 May 2023, on five high-market capitalization companies, still emphasize and illuminate the importance of ensuring and maintaining efficient and fair markets.