Evaluating trade classification algorithms: Bulk volume classification versus the tick rule and the Lee-Ready algorithm

Bidisha Chakrabarty, Roberto Pascual and Andriy Shkilko

Journal of Financial Markets, 2015, vol. 25, issue C, 52-79

Abstract: We compare the accuracy of the bulk volume classification (BVC) to that of the tick rule (TR) and the Lee-Ready (LR) algorithm for a large sample of equities. TR and LR produce significantly better classifications than the BVC. This result applies to stocks of all sizes, including the most frequently traded. Iteratively optimizing the BVC improves its performance, but the conventional rules still outperform. TR and LR produce more accurate estimates of the volume-synchronized probability of informed trading. Order imbalances computed using TR and LR are comparable to those computed using the BVC in explaining returns, liquidity, and trading costs.

Keywords: Trade classification; Bulk volume classification; Tick rule; Lee and Ready; VPIN (search for similar items in EconPapers)
JEL-codes: G10 G14 G29 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:25:y:2015:i:c:p:52-79

DOI: 10.1016/j.finmar.2015.06.001

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