A computing bias in estimating the probability of informed trading

Hsiou-Wei William Lin and Wen-Chyan Ke

Journal of Financial Markets, 2011, vol. 14, issue 4, 625-640

Abstract: This study identifies a factor that leads to a bias in estimating the probability of informed trading (PIN), a widely-used microstructure measure. It is shown that, along with the numerical maximization of the likelihood function for PIN, the floating-point exception (i.e., overflow or underflow) may eliminate feasible solutions to the actual parameters in the optimization problem. Approximately 44% of PIN estimates for recent stock market data may have been subject to a downward bias that is more pronounced for active stocks than for inactive stocks. This study develops a remedy to mitigate the resulting bias.

Keywords: Floating-point; exception; Informed; trading; Market; microstructure (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:14:y:2011:i:4:p:625-640

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