In this research, we explore the relationship between trading activities we have classified as insider trading by Congress members and the performance of the stocks involved. We will test the following hypotheses:
- Congressional insider trading will consistently outperform the S&P 500.
- The disclosure of trading activities by members of certain committees exerts varied impacts on stock performance. Specifically, committees associated with finance, healthcare, and technology wield a pronounced influence on the stocks they trade, resulting in notable price fluctuations following the revelation of such activities.
Our research touches upon several intriguing and potentially impactful aspects that could pique the interest of a broader audience:
- General Public: Provides the extent to which elected officials use privileged information for personal gain, thus prompting discussions on ethical standards and calls for stricter regulations.
- Policy Makers: Offers valuable data to inform the development of regulations aimed at curbing unethical trading practices among elected officials, thereby enhancing public trust in government institutions and maintaining a level playing field for all market participants.
- Individual Investors: Offers potential insights into profitable investment opportunities and strategies by understanding the impact of Congressional insider trading on stock performance, empowering investors to make more informed decisions in financial markets.
To accomplish this, our dashboard will consist of 4 pages:
- Performance of the S&P 500 vs. all Congress trades vs. Congress trades classified as insider trading
- Trades are classified as insider trading if the person makes the trade on a stock belonging to the industry committee that they are sitting on.
- How to use/Appendix
- EDA
- How long does each Congress member hold the position typically?
- Comparison of the performance between the two parties and between Congressional members (who makes the best trades?)
- Does their trading behavior coincide with any legislative changes? What is the average time difference between their trades and the release of new bills?
- How do market participants react to news or disclosures related to Congress members' trading activities? (i.e. Is there a spike in stock price after the trades are reported? How do market volatility and trading volume change in response to Congress trades?
- How do the volume and frequency of trades vary over time?
- How do the returns of trades classified as insider trading compare to non-insider trades?
- Trade analysis of individual Congress members (drop-down menu for selecting individual Congress members)
- Congress Trades Data: Information on trades made by members of Congress.
- Source: Senate Stock Watcher API
- S&P 500 Performance Data: Closing prices of GSPC for calculating the daily cumulative returns.
- Source: Yahoo Finance
- Committee Membership Data: The industry committees on which each Congress member serves for classifying trades as insider trading.
- Source: House of Representatives and Senate Committees
| Dataset | Observation | Sample Period | Sample Conditions | Necessary Variables |
|---|---|---|---|---|
| Daily Cumulative Returns for the S&P 500 | Each row represents the cumulative returns of the S&P 500 index up to the corresponding date. | 10 years before the project’s due date (April 30, 2014 - Present) | None | Date, S&P 500 Return, S&P 500 cumulative return |
| Individual Trades per Congress Member | Each row represents a single trade made by a Congress member. | Same as above | Don’t include trades made outside of our sample period | Congress Member, Party Affiliation, Trade Date, Stock Traded (ticker), Trade Volume, Trade Amount, Trade Type (buy/sell), gsector, Committee(s) Served, Insider Trading Flag |
| Daily Cumulative Returns of All Trades per Congress Member | Each row represents the cumulative returns of all trades made by a specific Congress member up to the corresponding date. | Same as above | Don’t include returns for trades made outside of our sample period | Congress Member, Date, Daily Return, Daily Cumulative Return, Committee(s) served |
| Daily Cumulative Returns of Insider Trades per Congress Member | Each row represents the cumulative returns of insider trades made by a specific Congress member up to the corresponding date. | Same as above | Same as above | Congress Member, Date, Daily Return (Insider), Cumulative Daily Return (Insider), Insider Trading Flag |
Step 1: Prepare and Clean Data
- Clean the data: Ensure critical columns have no missing values. For date columns, ensure they are in a consistent date format. Cleanse ticker symbols and names for uniformity.
Step 2: Calculate Daily Cumulative Returns for the S&P 500
- Filter
sp500_daily_price.csvfor the required date range (April 30, 2014 - Present). - Calculate daily returns using the adjusted closing price. The daily return can be calculated using the formula:
Daily Return = (Price_t - Price_t-1) / Price_t-1 - Calculate cumulative returns: Cumulate the daily returns using a cumulative sum function.
Step 3: Analyze Individual Trades per Congress Member
- Combine
house_representatives.csvandsenate_representatives.csvinto a singlecongress_members.csvdataset. - Merge
individual_trades.csvwithcongress_members.csvto associate each trade with a congress member's details, particularly the committee. - Filter trades within the required date range.
- Determine insider trading flag: If the committee matches gsector, flagged as insider trading.
Step 4: Calculate Cumulative Returns of All Trades Per Congress Member
- Calculate daily returns for each stock traded by Congress members using
daily_stocks_prices.csv. - Aggregate these daily returns per Congress member: This involves grouping data by Congress member and date and summing up all individual stock returns for that day.
- Calculate cumulative returns for each Congress member over time.
Step 5: Cumulative Returns of Insider Trades Per Congress Member
- Filter the trades dataset for insider trades based on the insider trading flag.
- Repeat steps similar to Step 4, but only for the filtered insider trades dataset.
**Step 6: Compare Ticker Performance on Days Pre/Post Disclosure
- Obtain cumulative returns for tickers t-3 and t+3 of the event (financial disclosure of Congress member)
- Compare cumulative returns, and if there is a substantial change, then flag the transaction.
At the time of writing (04/24), our project will be different from some of the major research currently available in the following areas:
- Unusual Whales1 does not consider the "Conflict of Interest" factor in determining Congress members' overall returns. Extrapolating this will provide a new level of insight into how Congress members use their privileged position and knowledge to outperform the market.
- The New York Times article on Congress Stock Trades2 required a lot of manual research and lacked valuable insights into the extent of the issue by considering cumulative returns. By automating this research and calculating returns similar to Unusual Whales1, we are linking two powerful approaches to uncovering the extent of the issue.
- After a record rally in NVIDIA stock following a bet on the company by the spouse of former Speaker of the House Nancy Pelosi3, there is reason to be concerned about the potential market manipulation a public financial disclosure by a Congress member has on market performance. Therefore, our research will include an event study and analysis on this topic.