Study On Formation Mechanism And Identification Mechanism Of Insider Trading In Chinese Stock Market

Insider trading is very serious in China’s stock market, which interferes with thenormal order of the stock market, violates the principle of fair, just and open, damagesthe interests of minority investors, and is unbeneficial to the healthy development of thestock market. In recent years, insider trading has become the hot point of the academia,the extensive and thorough research are conducted from measurement, strategy,influence, regulatory and other aspects of insider trading, but little research is carriedout from the formation mechanism and identification mechanism of insider trading, thispaper is based on the reason.The formation mechanism of insider trading is analyzed, utilizing the informationspace theory and mathematical model. Then, the degree of insider trading is measuredin China’s stock market, by using two measurement methods for Probability ofInformed Trading and Trade Imbalance Ratio, and the characteristics of insider tradingis analyzed. On this basis, it reveals the main influential factors of insider trading frommultiple perspectives in China’s stock market, empirical analyzes market reaction ofinsider trading in China’s stock market using related data, and identifies insider tradingin China’s stock market using the Support Vector Machine based on Particle SwarmOptimization. Finally, based on regulative principles of insider trading, this paper gameanalyzes the regulation of insider trading, and puts forward the suggestions andmeasures for the prevention of insider trading.1. Research conclusions（1）The insider trading frequently occurs in announcement period of listedcompanies, it is most serious before information announcement. By two measurementmethods for Probability of Informed Trading and Trade Imbalance Ratio, the degree ofinsider trading is measured in China’s stock market, using the high frequency data of Ashares of listed companies, which occurred restructuring, high stock dividends and splits,performance growing and loss forecast in Shanghai and Shenzhen Stock Exchange in2009, insider trading is found that frequently occurs in announcement period of listedcompanies, especially most serious before information announcement, it is explainedthat the insiders generally trade using insider information before announcement. Inaddition, this paper reveals the several characteristics of insider trading in China’s stockmarket，that are complex participate, diversified trading way, universal and concealment trading behavior, different insider trading of various market environments, simultaneityof insider trading and other illegal behaviors, major assets restructuring in insidertrading.（2）The institutional and large individual investors are participants andbeneficiaries of insider trading. On the basis of theoretical analysis, the paper considersthat the institutional and large individual investors are considered that have obviousadvantage of information through various channels to obtain the insider information,they use insider information to obtain illegal income or evade the risk, and who areparticipants and beneficiaries of insider trading in China’s stock market, but theminority investors have distinct disadvantage of information, and who are the victims ofinsider trading. This paper further empirically verifies the view from capital flows ofinstitutional and large individual investors. On the foundation, the regulative object isput forward to be focused on institutional and large individual investors, in order toimprove the regulative efficiency of insider trading.（3）The main influential factors of insider trading in China’s stock market aregovernance structure defect of listed companies, low information transparency,information asymmetry and poor legal environment. Based on behavioral finance theory,information asymmetry theory and market microstructure theory, this paper reveals themain influential factors of insider trading in China’s stock market, including:governance structure defects of listed companies, low information transparency of listedcompanies, the information asymmetry between investors, poor legal systemenvironment. In addition, it is found that the insiders by using positive information isgreater than bad information in the lack of short selling mechanism in China’s stockmarket.（4）The insider trading can improve the information efficiency of stock market,reduce market liquidity and increase market volatility. Based on literature review andtheoretical analysis, it is considered that the insider trading can improve the informationefficiency of stock market through information dissemination and diffusion, reduceliquidity and increase volatility of stock market. Using related data in China’s stockmarket, the empirical results show that the degree of insider trading is significantpositive related to the information efficiency and the volatility of stock market,significant negative related to the liquidity of stock market, so above view is verified.（5）We should take effective preventive measures from many aspects, in order toreduce the occurrence of insider trading. This paper proposes three principles for the prevention of insider trading, that is the principle of open, fair and just, combiningprinciple of early warning, monitoring and after investigation, combining principle ofgovernment supervision and self-discipline management. On this basis, in order toreduce the occurrence of insider trading, this paper considers that we should build anearly warning mechanism, establish the dynamic regulative mechanism, strengthen thepunishment on insider trading, set up the multi-level regulative system of multi-jointmanagement, perfect the corporate governance structure and information disclosuresystem, carry out the investor education and guide rational investment behavior.2. The main innovations（1）The analysis framework of formation mechanism of insider trading isestablished based on the information space theory. For the academic research weak tothe formation mechanism of insider trading, the information space theory is explorativeapplied to the research, this paper sets up the analysis framework of formationmechanism of insider trading based on the information space theory, expands the newresearch field, forms new knowledge and understanding of formation mechanism, andmakes the conclusion more persuasion.（2）The main influential factors of insider trading in China’s stock market isrevealed from the multiple views. This paper applies the asymmetric information theory,behavioral finance theory, the market microstructure theory to China’s stock market,using relative high frequency data of listed companies, analyzes the main influentialfactors of insider trading in China’s stock market from the multiple perspectives. At thesame time, this paper empirically tests that the insiders by using positive information isgreater than bad information in the lack of short selling mechanism in China’s stockmarket.（3）This paper reveals that the institutional and large individual investors areparticipants and beneficiaries of insider trading from capital flows. About participantsand beneficiaries of insider trading, academia mostly discuss and research from theory,but lack of empirical support. Using capital flows of institutional and large individualinvestors, this paper empirically reveals that the institutional and large individualinvestors are participants and beneficiaries of insider trading, and the uninformedminority investors are the victims. On the foundation, the regulative object is putforward to be focused on institutional and large individual investors.（4）This paper establishes identification mechanism of insider trading of theSupport Vector Machine based on Particle Swarm Optimization. The insider trading behavior is recognized in China’s stock market, using the Support Vector Machinemodel based on Particle Swarm Optimization, this kind of research is relatively rare. Inorder to test effectiveness of the Particle Swarm Optimization Algorithm, it is comparedwith Grid Optimization Algorithm and Genetic Algorithm, it is found that the model hasbest identification effect. At the same time, it is discovered that the model has higherclassification precision and better generalization performance than Logit model, andbetter identification effect on insider trading. In addition, this paper attempts tointroduce the price information content into independent variables, the identificationeffect of insider trading is improved.