Olaf Stotz

Germany's New Insider Law: The Empirical Evidence after the First Year

Abstract This paper investigates insider trading activities in German stocks during the first year following implementation of the new Insider Law on 1 July 2002. It can be observed that insiders act as contrarian investors. They buy stocks after prices have fallen and sell stocks after prices have risen. In general, insider trades are very profitable. A typical stock purchased by an insider yields an abnormal return of almost 3 per cent during the 25 days following the transaction. In contrast, a typical stock that has been sold by insiders achieves an abnormal return of nearly -3 per cent over the same time period. Outsiders who copy the transactions of insiders can achieve nearly the same abnormal returns. Abnormal returns remain substantial even after transaction costs. The results suggest that prices of stocks in which insiders trade do not seem to be semi-strong efficient.

The influence of geography on the success of private equity: investments in listed equity

This article analyses short-term and long-term wealth effects of private equity investments in target companies which are already listed on a stock exchange. It also examines the importance of geography on both stock returns and accounting returns. In general, risk-adjusted short-term and long-term stock returns of target companies are positive. Also, changes in accounting returns are greater for target companies than for companies of the same industry. With respect to geography it is found that almost all of the positive returns result from private equity investments in target companies from the same country.

The relative pricing of European dividend futures and their predictive abilities for index returns

We use dividend futures prices to derive a dividend future discount model. Arbitrage arguments postulate that the sum of discounted dividend futures prices should equal the index price, i.e. the sum of discounted dividends. We analyze whether this relation holds and find that the two valuation approaches lead to a different valuation of expected dividends. These observations indicate that dividend futures and index prices seem to provide the investor with different information on future dividends. We further show that the difference in valuation can be used to forecast index returns and show how an investment strategy can exploit this predictability.

Do Retail Investors Follow Insider Trades

Abstract On the basis of transaction records of retail investors provided by a large financial institution, this article analyzes whether, in the aggregate, retail investors do copy insider trades. The results suggest that insider trades are indeed an important piece of information for the transactions of retail investors, whose buy-sell imbalances (BSIs) increase in stocks which insiders buy, and whose BSIs decrease following insider sales. These results are robust when considering stock characteristics and general attention effects. With regard to trading insider stocks, retail investors’ preferences for growth and attention are less pronounced when compared with trades of noninsider stocks.

Conditional strike prices of covered call and uncovered put strategies

This article investigates the Stochastic Dominance (SD) of investment strategies which combine a long position in a stock index with a short position in options written on that index. Two main issues are analysed here: First, exercise prices are analysed which are conditioned on proxies of expected returns. Second, next to the well-known covered call strategies, the SD of uncovered put strategies is also investigated. Empirical analysis of strategies on the Dow Jones EURO STOXX 50 Index shows that covered call strategies dominate an index investment at the second and third degrees, while uncovered put strategies fail to do so. It can be observed that strategies with conditional exercise prices are stochastically dominant to strategies with unconditional exercise prices.

A Macroeconomic Hedge Portfolios and the Cross-Section of Stock Returns

We use a stock’s covariation with unexpected macroeconomic news to derive a stock’s hedging ability of unexpected changes in an investor’s marginal utility. We form a macroeconomic hedge portfolio by going long in stocks with bad hedging abilities and short in stocks with good hedging abilities. This hedge portfolio earns a positive premium over time and a similar premium when used as a risk factor in an asset pricing model. When the macroeconomic hedge portfolio is present in an asset pricing model, the factors HML and SMB lose most of their power to explain the cross-section of expected returns.

Are Private Equity Investors Corporate Raiders or Corporate Doctors? The Influence of Geography on the Success of Private Equity Investments in Listed Equity

This paper analyses short-term wealth effects and long-term wealth effects of private equity investments in target companies already listed on a stock exchange and examines the importance of geography on stock returns and accounting returns. In general, risk-adjusted short-term and long-term stock returns of target companies are positive. Moreover, target companies realize higher announcement returns and larger improvements in accounting returns when the private equity investor and the target are from the same country. These observations support the hypothesis that private equity investors are corporate doctors (and are also perceived as doctors by the market).