ESTIMATION OF TIME VARYING ADJUSTED PROBABILITY OF INFORMED TRADING AND PROBABILITY OF SYMMETRIC ORDER-FLOW SHOCK

Daniel Preve and Yiu-Kuen Tse Author Email:yktse@smu.edu.sg
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Yiu-Kuen Tse Author Email:yktse@smu.edu.sg: School of Economics, Singapore Management University

Working Papers from Singapore Management University, Sim Kee Boon Institute for Financial Economics

Abstract: Recently Duarte and Young (2009) study the probability of informed trading (PIN) proposed by Easley et al.(2002) and decompose it into two parts: the adjusted PIN (APIN) as a measure of asymmetric information and the probability of symmetric order- ow shock (PSOS) as a measure of illiquidity. They provide some cross-section estimates of these measures using daily data over annual periods. In this paper we propose a method to estimate daily APIN and PSOS by extending the method in Tay et al. (2009) using high-frequency transaction data. Our empirical results show that while PIN is positively contemporaneously correlated with variance, APIN is not. On the other hand, PSOS is positively correlated with daily average e ective spread and variance, which is consistent with the interpretation of PSOS as a measure of illiquidity. Compared to APIN, PSOS exhibits clustering and sporadic bursts over time.

Keywords: autoregressive conditional duration; market microstructure; probability of informed trading; probability of symmetric order-flow shock; transaction data (search for similar items in EconPapers)
Pages: 18 Pages
Date: 2012-06
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Journal Article: ESTIMATION OF TIME‐VARYING ADJUSTED PROBABILITY OF INFORMED TRADING AND PROBABILITY OF SYMMETRIC ORDER‐FLOW SHOCK (2013)
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