Aggregate Insider Trading and the Prediction of Credit Spread Changes

Abstract

In this paper, we show aggregate insider trading to be a predictor of future changes in U.S. corporate credit spreads. In contrast to others who focus solely on the stock market, we fill a gap in the literature by finding a negative effect of the aggregate net position of insiders on credit spread changes. This effect is stable for various prediction horizons and is stronger for middle managers, insiders at firms with an investment grade rating and during the 2008/09 crisis. Furthermore, univariate models using this predictor achieve an adjusted R² up to 34 percent while a one standard deviation increase in aggregate trading translates into a decrease up to 78 percent of the standard deviation of credit spread changes. Our findings suggest accounting for differences among insiders may provide new guidance for investors who seek to diversify portfolios when investing in the U.S. corporate bond market, specifically in the medium run.