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Using High-Frequency Transaction Data to Estimate the Probability of Informed Trading

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  • Anthony Tay
  • Christopher Ting
  • Yiu Kuen Tse
  • Mitch Warachka

Abstract

This paper applies the asymmetric autoregressive conditional duration (AACD) model of Bauwens and Giot (2003) to estimate the probability of informed trading (PIN) using irregularly spaced transaction data. We model trade direction (buy versus sell orders) and the duration between trades jointly. Unlike the Easley, Hvidkjaer, and O'Hara (2002) approach, which uses the aggregate numbers of daily buy and sell orders to estimate PIN, our methodology allows for interactions between consecutive buy-sell orders and accounts for the duration between trades and the volume of trade. We extend the Easley--Hvidkjaer--O'Hara framework by allowing the probabilities of good news and bad news to vary each day. Our PIN estimates can be computed daily as well as over intraday intervals. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbp005
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Bibliographic Info

Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 7 (2009)
Issue (Month): 3 (Summer)
Pages: 288-311

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Handle: RePEc:oup:jfinec:v:7:y:2009:i:3:p:288-311

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Cited by:
  1. Hahn, TeWhan & Ligon, James A. & Rhodes, Heather, 2013. "Liquidity and initial public offering underpricing," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 4973-4988.
  2. DANIEL PREVE & Yiu-Kuen Tse, 2012. "Estimation Of Time Varying Adjusted Probability Of Informed Trading And Probability Of Symmetric Order-Flow Shock," Working Papers, Sim Kee Boon Institute for Financial Economics CoFie-05-2011, Sim Kee Boon Institute for Financial Economics.

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