An Agent-Based Investigation of the Probability of Informed Trading

Olivier Brandouy () and Philippe Mathieu ()
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Olivier Brandouy: Sorbonne Graduate Business School
Philippe Mathieu: Université Lille 1

A chapter in Artificial Economics and Self Organization, 2014, pp 121-132 from Springer

Abstract: Abstract We study the Volume Synchronized Probability of Informed Trading (VPIN) proposed by Easley D, López de Prado M, O’Hara (Rev Financ Stud 25:1457–1493, 2010) as a consistent measure of the “order flow toxicity”. The VPIN is a proxy for the probability that informed traders adversely select uninformed ones, notably Market Makers. We use a price-driven, asynchronous, agent-based artificial market where populations of agents evolve according to the general logic and within a similar framework as proposed by Easley D, Kiefer D, O’Hara M, Paperman J (J Financ 51(4):1405–1436, 1996). Among others, we document situations in which the VPIN is at high levels even if no informed trading is at play. This ambiguity in the consistency of the VPIN suggests that this measure may mislead competitive market makers in their decisions about the spread.

Keywords: Reservation Price; Market Maker; Order Book; Informed Trader; Artificial Market (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-319-00912-4_10

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DOI: 10.1007/978-3-319-00912-4_10

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