How Much Are the NSA and CIA Front Running Markets?
A 2008 paper by Arindrajit Dube, Ethan Kaplan, and Suresh Naidu (hat tip MS) found evidence that the CIA and/or members of the Executive branch either disclosed or acted on information about top-secret authorizations of coups. Stocks in “highly exposed” firms rose more in the pre-coup authorization phase than they did when the coup was actually launched.
Here’s how the dataset was developed:
We selected our sample of coups on the following basis: (1.) a CIA timeline of events or a secondary timeline based upon an original CIA document existed, (2.) the coup contained secret planning events including at least one covert authorization of a coup attempt by a national intelligence agency and/or a head of state, and (3.) the coup authorization was against a government which nationalized property of at least one sufficiently exposed multinational firm with publicly traded shares.
Out of this, the authors found four coup attempts that met their criteria: the ouster of Muhammed Mossadegh in Iran in 1953, two programs in Guatemala in 1952 and 1954 that eventually removed Jacobo Arbenz Guzman; the unsuccessful effort to topple Castro in 1961, and an operation that began in Chile in 1970 and culminated in overthrow of Salvador Allende. Then they chose companies:
We apply 3 criteria to select our sample of companies. First, a company must be publicly traded, so that we can observe a stock price. Secondly, the company must be “well-connected”, in terms of being linked to the CIA. Finally, the company should be highly exposed to political changes in the affected country, in the sense that a large fraction of a company’s assets are in that country.
They used these criteria to devise two samples (based on different definitions of “highly exposed”) and tested both.
Covert operations organized and abetted by foreign governments have played a sub- stantial role in the political and economic development of poorer countries around the world. We look at CIA-backed coups against governments which had nationalized a considerable amount of foreign investment. Using an event-study methodology, we find that private information regarding coup authorizations and planning by the U.S. government increased the stock prices of expropriated multinationals that stood to benefit from the regime change. The presence of these abnormal returns suggests that there were leaks from the CIA or others in the executive branch of government to asset traders or that government officials with access to this information themselves traded upon it. Consistent with theories of asset price determination under private information, this information took some time to be fully reflected in the stock price. Moreover, the evidence we find suggests that coup authorization information was only present in large, politically connected companies which were also highly exposed.
We find that coup authorizations, on net, contributed more to stock price rises of highly exposed and well connected companies than the coup events themselves. These price changes reflect sizeable shifts in beliefs about the probability of coup occurrence.
Our results are robust across countries, except Cuba, as well as to a variety of controls for alternate sources of information, including public events and newspaper articles. The anomalous results for Cuba are consistent with the information leaks and inad- equate organization that surrounded that particular coup attempt.
Now sports fans, given the fact that there’s reason to believe that people in the intelligence with access to privileged information weren’t above leaking it to people who could take advantage of it, why should we expect things to be different now? And given what has already been revealed about the NSA’s data gathering, if you were a clever trader and had access to this information, how would you mine it? How would you go about finding patterns or events to exploit?