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VPIN and the Flash Crash

Author

Listed:
  • Torben G. Andersen

    (Kellogg School of Management; Northwestern University and CREATES)

  • Oleg Bondarenko

    (Department of Finance (MC 168), University of Illinois at Chicago)

Abstract

Easley, Lopez de Prado and O'Hara introduce VPIN as a real-time indicator of order flow toxicity. They find it useful for monitoring order fl ow imbalances and signaling impending market turmoil, exemplified by the ash crash. They also deem VPIN a good forecaster of short-term volatility. In contrast, we find that VPIN is a poor volatility predictor, that it only reached an all-time high following the ash crash, and that its predictive content stems from a mechanical relation with trading intensity. Generally, we caution against adoption of any specific market stress metric until it is compared thoroughly to suitable benchmarks.

Suggested Citation

  • Torben G. Andersen & Oleg Bondarenko, 2011. "VPIN and the Flash Crash," CREATES Research Papers 2011-50, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2011-50
    as

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    References listed on IDEAS

    as
    1. Torben G. Andersen & Oleg Bondarenko, 2013. "Assessing Measures of Order Flow Toxicity via Perfect Trade Classification," CREATES Research Papers 2013-43, Department of Economics and Business Economics, Aarhus University.
    2. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
    3. Epps, Thomas W & Epps, Mary Lee, 1976. "The Stochastic Dependence of Security Price Changes and Transaction Volumes: Implications for the Mixture-of-Distributions Hypothesis," Econometrica, Econometric Society, vol. 44(2), pages 305-321, March.
    4. David Easley & Marcos M. López de Prado & Maureen O'Hara, 2012. "Flow Toxicity and Liquidity in a High-frequency World," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1457-1493.
    5. Torben G. Andersen & Oleg Bondarenko, 2007. "Construction and Interpretation of Model-Free Implied Volatility," NBER Working Papers 13449, National Bureau of Economic Research, Inc.
    6. Torben G. Andersen & Oleg Bondarenko & Maria T. Gonzalez-Perez, 2011. "Coherent Model-Free Implied Volatility: A Corridor Fix for High-Frequency VIX," CREATES Research Papers 2011-49, Department of Economics and Business Economics, Aarhus University.
    7. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
    8. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    9. Andersen, Torben G, 1996. "Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility," Journal of Finance, American Finance Association, vol. 51(1), pages 169-204, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    VPIN; PIN; High-Frequency Trading; Order Flow Toxicity; Order Imbalance; Flash Crash; VIX; Volatility Forecasting.;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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