A computing bias in estimating the probability of informed trading
This study identifies a factor that leads to a bias in estimating the probability of informed trading (PIN), a widely-used microstructure measure. It is shown that, along with the numerical maximization of the likelihood function for PIN, the floating-point exception (i.e., overflow or underflow) may eliminate feasible solutions to the actual parameters in the optimization problem. Approximately 44% of PIN estimates for recent stock market data may have been subject to a downward bias that is more pronounced for active stocks than for inactive stocks. This study develops a remedy to mitigate the resulting bias.
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- Duarte, Jefferson & Young, Lance, 2009. "Why is PIN priced?," Journal of Financial Economics, Elsevier, vol. 91(2), pages 119-138, February.
- Joachim Grammig & Erik Theissen, 2002.
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- Joachim Grammig & Erik Theissen, 2003. "Estimating the Probability of Informed Trading - Does Trade Misclassification Matter?," University of St. Gallen Department of Economics working paper series 2003 2003-01, Department of Economics, University of St. Gallen.
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"Knowing Me, Knowing You: Trader Anonymity and Informed Trading in Parallel Markets,"
Publications of Darmstadt Technical University, Institute for Business Studies (BWL)
35288, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
- Grammig, Joachim & Schiereck, Dirk & Theissen, Erik, 2001. "Knowing me, knowing you: : Trader anonymity and informed trading in parallel markets," Journal of Financial Markets, Elsevier, vol. 4(4), pages 385-412, October.
- 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.
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