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VPIN, liquidity, and return volatility in the U.S. equity markets

Serhat Yildiz, Bonnie Van Ness and Robert Van Ness

Global Finance Journal, 2020, vol. 45, issue C

Abstract: We examine the volume-synchronized probability of informed trading metric (the VPIN flow toxicity metric, developed by Easley, Lopez de Prado, & O'Hara, 2012) as a real-time risk management tool for liquidity deteriorations in the U.S. equity markets. We find that VPIN provides information about market liquidity and stock return volatility on ex-ante basis. These results indicate that VPIN can be a useful risk-management tool for market makers, regulators and traders in the U.S. equity markets. We also document that VPIN is negatively associated with volume and number of trades, but positively associated with trade size and volume fragmentation. These findings suggest that VPIN indicates the adverse selection problem of liquidity providers by capturing the information in volume.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:45:y:2020:i:c:s1044028318302679

DOI: 10.1016/j.gfj.2019.100479

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