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Abnormal Returns from the Common Stock Investments of the U.S. Senate

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Abstract

The actions of the federal government can have a profound impact on financial markets. As prominent participants in the government decision making process, U.S. Senators are likely to have knowledge of forthcoming government actions before the information becomes public. This could provide them with an informational advantage over other investors. We test for abnormal returns from the common stock investments of members of the U.S. Senate during the period 1993 1998. We document that a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month, while a portfolio that mimics the sales of Senators lags the market by 12 basis points per month. The large difference in the returns of stocks bought and sold (nearly one percentage point per month) is economically large and reliably positive.
... relying on a change in regulatory environment (for example, the passing of STOCK Act in 2012 or the amendment of the act in 2013) as a shock and using difference-in-difference method (Wilson, 2018;Lenz and Lim, 2009), 2). constructing calendar-time portfolios (Ziobrowski et al., 2004) or holdings-and-transactions-based portfolios (C. Eggers and Hainmueller, 2013), and lastly 3). ...
... A number of studies have investigated the information advantage of politician trades in various settings. The first study analyzing the trades of congress members in a detailed empirical methodology is done by Ziobrowski et al. (2004). Constructing synthetic calendar-time portfolios which mirror the purchases and sales of US Senators, they show that between 1993 and 1998, these portfolios beat the market by approximately 97 basis points a month. ...
... To the extent that insider trading of congress members has been around for long and not a partisan phenomenon(Barbabella et al., 2019), we can reasonably expect the positive effect documented here to be prevalent in both parties, Representatives, and Senate(Ziobrowski et al., 2004). ...
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