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Estimating The Probability Of Informed Trading: Further Evidence From An Order-Driven Market

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Author Info

  • David Abad

    ()
    (Universidad de Alicante)

  • Antonio Rubia

    (Universidad de Alicante)

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    Abstract

    Nyholm (2002, 2003) [J. of Financial Research, 25, pp. 485; J. of Applied Econometrics, 18, pp. 457] has proposed a new procedure to infer the probability of informed negotiation on a trade-to-trade basis through a regime-switching model. We provide further empirical evidence about the performance of this model by using trade-related information, such as the degree of aggressiveness and the trade size, on a pure order-driven market. It is evidenced that the switching scheme of the basic model is closely related to the arrival of different types of orders and not necessarily to information. This feature also applies when controlling for market variables other than order aggressiveness (e.g., trade size). The updating process in the non-linear setting proves so complex that it is necessary to account for a number of different microstructure effects to provide probabilities related to information arrivals. This evidence casts doubts about the general suitability of the procedure.

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2004-38.pdf
    File Function: Fisrt version / Primera version, 2004
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    Bibliographic Info

    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2004-38.

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    Length: 44 pages
    Date of creation: Oct 2004
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasad:2004-38

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    Keywords: Probability of Informed Trading; PIN; Order aggressiveness.;

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    References

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    1. Ken Nyholm, 2003. "Inferring the private information content of trades: a regime-switching approach The views presented in the paper are not necessarily shared by the European Central Bank," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(4), pages 457-470.
    2. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
    3. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 623-56.
    4. Hans Degryse & Frank Jong & Maarten Ravenswaaij & Gunther Wuyts, 2005. "Aggressive Orders and the Resiliency of a Limit Order Market," Review of Finance, Springer, vol. 9(2), pages 201-242, 06.
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    20. Dufour, Alfonso & Engle, Robert F, 1999. "Time and the Price Impact of a Trade," University of California at San Diego, Economics Working Paper Series qt62c0h04j, Department of Economics, UC San Diego.
    21. Hasbrouck, Joel, 1991. "The Summary Informativeness of Stock Trades: An Econometric Analysis," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 571-95.
    22. Ahn, Hee-Joon & Cai, Jun & Hamao, Yasushi & Ho, Richard Y. K., 2002. "The components of the bid-ask spread in a limit-order market: evidence from the Tokyo Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 9(4), pages 399-430, November.
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    Cited by:
    1. David Abad & Antonio Rubia, 2005. "Modelos De Estimacion De La Probabilidad De Negociacion Informada: Una Comparacion Metodologica En El Mercado Español," Working Papers. Serie EC 2005-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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