How to yield abnormal return by replicating insider trades - A study on the Swedish stock market

Abstract: The objective of the study is to verify if it is possible to replicate insider trades in order to yield an abnormal return. The objective will be reached by investigating previous research within the field of insider trading in order to examine under which condition replication of insider trades can be profitable for outsiders. Further, to determine if previous researchers have identified a theory where replication of insider trades actually is possible. The theory will then be tested on current market data from the AFXG index. The course of action is within accordance to an event study presented by MacKinlay (1997), where assumptions and conditions are based upon the meta-analysis of previous research; hence the data has been calculated with the adjusted market model. But also examined within a 90 days event window, where both single insider- as well as cluster transactions has been analyzed. Further the research qualifies as a quantitative study where a deductive procedure has been used. All data has been gathered from the AFGX index, where 40 random firms have been selected; five from each of the eight sectors. Lastly, the data has been statistically tested with the student t-test in order to examine if the result is of statistical significance. The result of the study shows that one can yield an abnormal return between 1,96% to 2,45% by replicating single insider trades. This is with 99,95% significance. By replicating insider cluster transactions one can also yield an abnormal return, however, the return is lower than for single insider trades and no significance were found. As for the meta-analysis of previous research, it was found that a security is to be held for approximately 90 days in order to achieve the desired positive effect of the insider trade. Further, small firms seems to yield the highest abnormal return, clusters transactions increases the possible abnormal return and when higher executives in different positions trade, a stronger buying signal for the stock is given.