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Reflecting on the VPIN dispute

Torben Andersen () and Oleg Bondarenko

Journal of Financial Markets, 2014, vol. 17, issue C, 53-64

Abstract: In Andersen and Bondarenko (2014), using tick data for S&P 500 futures, we establish that the VPIN metric of Easley, López de Prado, and O'Hara (ELO), by construction, will be correlated with trading volume and return volatility (innovations). Whether VPIN is more strongly correlated with volume or volatility depends on the exact implementation. Hence, it is crucial for the interpretation of VPIN as a harbinger of market turbulence or as a predictor of short-term volatility to control for current volume and volatility. Doing so, we find no evidence of incremental predictive power of VPIN for future volatility. Likewise, VPIN does not attain unusual extremes prior to the flash crash. Moreover, the properties of VPIN are strongly dependent on the underlying trade classification. In particular, using more standard classification techniques, VPIN behaves in the exact opposite manner of what is portrayed in ELO (2011a, 2012a). At a minimum, ELO should rationalize this systematic reversal as the classification becomes more closely aligned with individual transactions.

Keywords: VPIN; PIN; High-frequency trading; Order flow toxicity; Order imbalance; Flash crash; VIX; Volatility forecasting (search for similar items in EconPapers)
JEL-codes: G01 G14 G17 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (6) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:17:y:2014:i:c:p:53-64

DOI: 10.1016/j.finmar.2013.08.002

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