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Estimation Of Time Varying Adjusted Probability Of Informed Trading And Probability Of Symmetric Order-Flow Shock

Author

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  • DANIEL PREVE

    (City University of Hong Kong)

  • Yiu-Kuen Tse

    (School of Economics, Singapore Management University)

Abstract

Recently Duarte and Young (2009) study the probability of informed trading (PIN) proposed by Easley et al.(2002) and decompose it into two parts: the adjusted PIN (APIN) as a measure of asymmetric information and the probability of symmetric order- ow shock (PSOS) as a measure of illiquidity. They provide some cross-section estimates of these measures using daily data over annual periods. In this paper we propose a method to estimate daily APIN and PSOS by extending the method in Tay et al. (2009) using high-frequency transaction data. Our empirical results show that while PIN is positively contemporaneously correlated with variance, APIN is not. On the other hand, PSOS is positively correlated with daily average e ective spread and variance, which is consistent with the interpretation of PSOS as a measure of illiquidity. Compared to APIN, PSOS exhibits clustering and sporadic bursts over time.

Suggested Citation

  • DANIEL PREVE & Yiu-Kuen Tse, 2012. "Estimation Of Time Varying Adjusted Probability Of Informed Trading And Probability Of Symmetric Order-Flow Shock," Working Papers CoFie-05-2011, Singapore Management University, Sim Kee Boon Institute for Financial Economics.
    • Handle: RePEc:skb:wpaper:cofie-05-2011
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    Cited by:

    1. Ping-Chen Tsai & Chi-Ming Tsai, 2021. "Estimating the proportion of informed and speculative traders in financial markets: evidence from exchange rate," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(3), pages 443-470, July.
    2. Pérez-Rodríguez, Jorge V. & Sosvilla-Rivero, Simón & Andrada-Felix, Julián & Gómez-Déniz, Emilio, 2022. "Searching for informed traders in stock markets: The case of Banco Popular," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).

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