By |Published On: November 6th, 2013|Categories: Research Insights|

Informed Trading at Capitol Hill: Evidence from Congressional Trading

  • Serkan Karadas
  • A version of the paper can be found here.
  • Want a summary of academic papers with alpha? Check out our free Academic Alpha Database!

Abstract:

This paper investigates whether the members of Congress are informed traders by studying the information content of approximately 62,000 congressional common stock transactions over the 2004-2010 period via pooled regressions and transactions-based calendar-time portfolios. We present evidence that past rm-level trading activity by politicians predicts current rm-level stock returns, and this prediction is stronger for the pre-recession period and for small rms. We also document that there are abnormal returns on the powerful politicians’ portfolios constructed by longing the buy and shorting the sell transactions. The best performing group is the unsophisticated (i.e., inexperienced in trading) powerful Republicans with abnormal returns exceeding 34% on annual basis under one-week holding period. The abnormal returns decline monotonically as the holding period gets longer and they mostly disappear beyond three months. Our results imply that politicians trade on time-sensitive value-relevant information generating abnormal returns in the short-term, and the power and party membership play an important role in the distribution of value-relevant information.

Data Sources:

CRSP/COMPUSTAT

STOCK Act Fixes Problem…but the Government Clowns “Fixed their Problem”
http://sunlightfoundation.com/blog/2013/04/18/stock-act-strikeout-visualized/

The Congress booted out the section (with unanimous approval) where they had to disclose their positions online. Classic.

redline

Why so guarded, Congress?

Nice alphas! The results depend on the holding period and weighting scheme, but there is a large amount of excess return on the table (5%++). Interestingly, Republicans are the worst offenders (see paper for details)!
nicealpha
What are we doing wasting our time in the private sector?

About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

Important Disclosures

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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