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Probability of Informed Trading and Volatility for an ETF

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  • Dimitrios Karyampas

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • Paola Paiardini

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We use the new procedure developed by Easley et al. to estimate the Probability of Informed Trading (PIN), based on the volume imbalance: Volume-Synchronized Probability of Informed Trading (VPIN). Unlike the previous method, this one does not require the use of numerical methods to estimate unobservable parameters. We also relate the VPIN metric to volatility measures. However, we use most efficient estimators of volatility which consider the number of jumps. Moreover, we add the VPIN to a Heterogeneous Autoregressive model of Realized Volatility to further investigate its relation with volatility. For the empirical analysis we use data on the exchange traded fund (SPY).

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File URL: http://www.bbk.ac.uk/ems/research/wp/2011/PDFs/BWPEF1101.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 1101.

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Date of creation: Jun 2011
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Handle: RePEc:bbk:bbkefp:1101

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  1. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
  2. David Easley & Robert F. Engle & Maureen O'Hara & Liuren Wu, 2002. "Time-Varying Arrival Rates of Informed and Uninformed Trades," Finance 0207017, EconWPA.
  3. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
  4. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
  5. Bessembinder, Hendrik, 2003. "Issues in assessing trade execution costs," Journal of Financial Markets, Elsevier, vol. 6(3), pages 233-257, May.
  6. Asquith, Paul & Oman, Rebecca & Safaya, Christopher, 2010. "Short sales and trade classification algorithms," Journal of Financial Markets, Elsevier, vol. 13(1), pages 157-173, February.
  7. Yacine Aït-Sahalia, 2005. "How Often to Sample a Continuous-Time Process in the Presence of Market Microstructure Noise," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 351-416.
  8. Henker, Thomas & Wang, Jian-Xin, 2006. "On the importance of timing specifications in market microstructure research," Journal of Financial Markets, Elsevier, vol. 9(2), pages 162-179, May.
  9. Neil Shephard & Ole E. Barndorff-Nielsen, 2003. "Power and bipower variation with stochastic volatility and jumps," Economics Series Working Papers 2003-W18, University of Oxford, Department of Economics.
  10. Peterson, Mark & Sirri, Erik, 2003. "Evaluation of the biases in execution cost estimation using trade and quote data," Journal of Financial Markets, Elsevier, vol. 6(3), pages 259-280, May.
  11. Fulvio Corsi, 2009. "A Simple Approximate Long-Memory Model of Realized Volatility," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(2), pages 174-196, Spring.
  12. Ole E. Barndorff-Nielsen, 2004. "Power and Bipower Variation with Stochastic Volatility and Jumps," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 1-37.
  13. Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-36, September.
  14. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  15. Ellis, Katrina & Michaely, Roni & O'Hara, Maureen, 2000. "The Accuracy of Trade Classification Rules: Evidence from Nasdaq," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 529-551, December.
  16. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 805-35.
  17. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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