Tuesday, May 24, 2011

Stock picks by the House of Representatives

Following an earlier study that found that Senator's stock trades earned significant abnormal returns, a new study shows that the same effect exists for members of the House of Representatives. 

I have no comment, at least none that is fit to print.

FYI: the original study was published in 2004 in the Journal of Financial and Quantitative Analysis (a top finance journal).  The abstract states:

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.

HT: George