Academic studies have shown that insider trading has generated abnormal returns in the United States since the 60s. We’ve also pointed to academic studies that investigated insider trading in Netherlands and confirmed even higher returns to insider purchases. Another country that has significant excess returns to insider trading is Italy.
A recent study that covers the January 1998-September 2002 period found that both insiders and outsiders imitating insiders earn abnormal returns in the Milan Stock Exchange. This holds true for both insider purchases and insider sales.
Italian regulations require insiders to disclose their transactions within 5 days to the Italian regulatory agency, Commissione Nazionale per le Società e la Borsa, or CONSOB. CONSOB is then required to announce these transactions to the public within 3 days. So, the maximum number of days between an insider transaction and the announcement of the transaction to the public is 8 days. The 10-day cumulative abnormal return after insider purchases was 1.44%, but obviously outsiders mimicking insiders won’t be able to get this. The 10-day cumulative abnormal return after insider sales is 0.43%. This means outsiders imitating insiders can sell their shares at a slightly higher price than insiders. Real abnormal returns aren’t realized within 10 days of the transactions being made public. It takes weeks, so there is huge profit potential for outsiders.
The study also found that during the first 5 weeks after the insider purchases, cumulative abnormal return is 7.29%. Cumulative abnormal return is 9.59% during the first 6 months and 14.05% within 12 months. These are amazing numbers. Outsiders imitating insider purchases can make 12.5% above index funds in Italy.
Imitating insider sales is even more profitable than imitating insider purchases. Cumulative abnormal returns are -7.64% after 5 weeks, -11.84% after 6 months, and -16.95 after 12 months. Since outsiders can execute their sales at a better price than insiders, their returns will even be higher.
Let us repeat that- imitating insider sales returns more than 17% per year. You can be the next Warren Buffett by imitating insiders in Italy!!
Sure, Italy has some laws against insider trading. But it’s obvious enforcement is lacking. Meanwhile, a profitable opportunity is available to outsiders.