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Dynamics of Symmetric Informed Trading and Order Flow Shock at Tehran Exchange Stock: A Hidden Markov Model Approach

Author

Listed:
  • Rezaei, Sadeq

    (Ph.D. in Financial Economics, Faculty of Economics, University of Tehran)

  • Mehrara, Mohsen

    (Professor in Economics, Faculty of Economics, University of Tehran)

Abstract

This paper aiming to accurately estimate the dynamic measures of trades stemming from information asymmetry and diverse opinions among investors. For this purpose, we estimated the daily measures of probability of informed trading (PIN) and symmetric-order flow shock (PSOS) 32 Tehran Stock Exchange (TSE) stocks belonging to 11 industries of TSE during the period from 2015 to 2018. PIN is an indicator of asymmetric information risk and PSOS indicating diverse opinions among investors whose variations and intensity play an important role in price formation and stock liquidity. Results indicate that the minimum and maximum values of PIN and PSOS indices are significantly different from their annual and four-year average. Accordingly, information risk varies remarkably along time and there is a substantial need to use dynamic models to study this risk. In most stocks that have higher market value experience less risks of asymmetric information and diverse opinions shocks than other stocks. Entirely, it appears that the average and the maximum of information risk and diverse opinions shocks at TSE are higher than in developed markets. Also, exchange rate shock in 2018 in Iran considerably increased diverse opinions on petrochemical and metal industries.

Suggested Citation

  • Rezaei, Sadeq & Mehrara, Mohsen, 2021. "Dynamics of Symmetric Informed Trading and Order Flow Shock at Tehran Exchange Stock: A Hidden Markov Model Approach," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 8(1), pages 25-54, June.
    • Handle: RePEc:ris:qjatoe:0217
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    More about this item

    Keywords

    Informed Trading; Symmetric Order Shock; Microstructure Model; Hidden Markov Model;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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