This excerpt from a Duke University study is just in from my friend Professor Anthony Sanders at George Mason University, who writes at Confounded Interest.
In reading the paper I did not necessarily get the sense that this was a nefarious form of communication. More like the kind of collegial exchanges of information that are so common to the revolving door nature of our modern financial regime. There are two sets of rules, and two methods of handling things. And insiders never speak ill of the actions of other insiders.
This is the 'money shot' from the abstract of the paper which is tracks the distribution of stock market gains over the FOMC information cycle:
"High return weeks do not line up with public information releases from the Federal Reserve or with the frequency of speeches by Fed officials.
Systematic informal communication of Federal Reserve officials with the media and the financial sector is a more plausible information transmission mechanism. We discuss the social costs and benefits of this method of communication."
And in related news, the Congress has just used its power to block an investigation of its own insider trading. Again.
Remember this blog post from 2011? Credibility Trap: US Congressmen and Their Staffs Regularly Engage In Insider Trading
It is hard to escape the credibility trap as a plausible explanation for the lack of serious financial reform and transparency in a system that has been shown to be plagued with a lack of sound regulatory oversight, price manipulation, and corruption in almost every major market.
I would certainly hope that there is a different explanation for what appears to be systematic insider trading since at least 1994.
Here is what Tony has to say about this Duke University paper at his blog:
Fed Consistently Leaked Non-Public Information to Selected Insiders
Researchers at Duke University and the University of California at Berkeley point to quantitative evidence that The Fed consistently leaks non-public information about its meetings, driving an investment pattern that has led to market gains.
Here is the paper: 292092121-Stock-Returns-Over-The-FOMC-Cycle
Here are stock returns over the FOMC cycles. Notice anything unusal?
And here are the 5 day returns with bootstrapped confidence bands.