IDEAS home Printed from https://ideas.repec.org/a/eee/finmar/v17y2014icp1-46.html
   My bibliography  Save this article

VPIN and the flash crash

Author

Listed:
  • Andersen, Torben G.
  • Bondarenko, Oleg

Abstract

The Volume-Synchronized Probability of Informed trading (VPIN) metric is introduced by Easley, López de Prado, and O'Hara (2011a) as a real-time indicator of order flow toxicity. They find the measure useful in monitoring order flow imbalances and conclude it may help signal impending market turmoil, exemplified by historical high readings of the metric prior to the flash crash. More generally, they show that VPIN is significantly correlated with future short-term return volatility. In contrast, our empirical investigation of VPIN documents that it is a poor predictor of short run volatility, that it did not reach an all-time high prior, but rather after, the flash crash, and that its predictive content is due primarily to a mechanical relation with the underlying trading intensity. We also investigate a later incarnation of VPIN, stemming from Easley, López de Prado, and O'Hara (2012a), and reach similar conclusions. In general, we stress that adoption of any specific metric for order flow toxicity should be contingent on satisfactory performance relative to suitable benchmarks, exemplified by the analysis we undertake here.

Suggested Citation

  • Andersen, Torben G. & Bondarenko, Oleg, 2014. "VPIN and the flash crash," Journal of Financial Markets, Elsevier, vol. 17(C), pages 1-46.
  • Handle: RePEc:eee:finmar:v:17:y:2014:i:c:p:1-46
    DOI: 10.1016/j.finmar.2013.05.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1386418113000189
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.finmar.2013.05.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Torben G. Andersen & Oleg Bondarenko, 2007. "Construction and Interpretation of Model-Free Implied Volatility," CREATES Research Papers 2007-24, Department of Economics and Business Economics, Aarhus University.
    4. 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.
    5. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
    6. 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.
    7. 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.
    8. David Easley & Marcos M. López de Prado & Maureen O'Hara, 2012. "Flow Toxicity and Liquidity in a High-frequency World," Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1457-1493.
    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)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    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. Torben G. Andersen & Oleg Bondarenko, 2015. "Assessing Measures of Order Flow Toxicity and Early Warning Signals for Market Turbulence," Review of Finance, European Finance Association, vol. 19(1), pages 1-54.
    3. Andersen, Torben G. & Bollerslev, Tim & Dobrev, Dobrislav, 2007. "No-arbitrage semi-martingale restrictions for continuous-time volatility models subject to leverage effects, jumps and i.i.d. noise: Theory and testable distributional implications," Journal of Econometrics, Elsevier, vol. 138(1), pages 125-180, May.
    4. repec:uts:finphd:39 is not listed on IDEAS
    5. Aris Kartsaklas, 2018. "Trader Type Effects On The Volatility‐Volume Relationship Evidence From The Kospi 200 Index Futures Market," Bulletin of Economic Research, Wiley Blackwell, vol. 70(3), pages 226-250, July.
    6. Manganelli, Simone, 2005. "Duration, volume and volatility impact of trades," Journal of Financial Markets, Elsevier, vol. 8(4), pages 377-399, November.
    7. Senarathne, Chamil W & Jayasinghe, Prabhath, 2017. "Information Flow Interpretation of Heteroskedasticity for Capital Asset Pricing: An Expectation-based View of Risk," MPRA Paper 78771, University Library of Munich, Germany, revised 04 Apr 2017.
    8. Ahadzie, Richard Mawulawoe & Jeyasreedharan, Nagaratnam, 2020. "Trading volume and realized higher-order moments in the Australian stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    9. Torben G. Andersen & Tim Bollerslev & Per Frederiksen & Morten Ørregaard Nielsen, 2010. "Continuous-time models, realized volatilities, and testable distributional implications for daily stock returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(2), pages 233-261.
    10. Manganelli, Simone, 2005. "Duration, volume and volatility impact of trades," Journal of Financial Markets, Elsevier, vol. 8(4), pages 377-399, November.
    11. Ran Xiao, 2019. "Essays on Price Discovery and Volatility Dynamics in Emerging Market Currencies," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5-2019.
    12. Andersen, Torben G. & Bondarenko, Oleg, 2014. "Reflecting on the VPIN dispute," Journal of Financial Markets, Elsevier, vol. 17(C), pages 53-64.
    13. Jinliang Li & Chunchi Wu, 2006. "Daily Return Volatility, Bid-Ask Spreads, and Information Flow: Analyzing the Information Content of Volume," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2697-2740, September.
    14. repec:uts:finphd:38 is not listed on IDEAS
    15. Rossi, Eduardo & Santucci de Magistris, Paolo, 2013. "Long memory and tail dependence in trading volume and volatility," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 94-112.
    16. Massimiliano Caporin & Angelo Ranaldo & Gabriel G. Velo, 2015. "Precious metals under the microscope: a high-frequency analysis," Quantitative Finance, Taylor & Francis Journals, vol. 15(5), pages 743-759, May.
    17. Keunbae Ahn, 2021. "Predictable Fluctuations in the Cross-Section and Time-Series of Asset Prices," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2021.
    18. Fei Su, 2018. "Essays on Price Discovery and Volatility Dynamics in the Foreign Exchange Market," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2018.
    19. Do, Hung Xuan & Brooks, Robert & Treepongkaruna, Sirimon & Wu, Eliza, 2014. "How does trading volume affect financial return distributions?," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 190-206.
    20. Abhinava Tripathi, 2021. "The Arrival of Information and Price Adjustment Across Extreme Quantiles: Global Evidence," IIM Kozhikode Society & Management Review, , vol. 10(1), pages 7-19, January.
    21. Loredana Ureche-Rangau & Quiterie de Rorthays, 2009. "More on the volatility-trading volume relationship in emerging markets: The Chinese stock market," Journal of Applied Statistics, Taylor & Francis Journals, vol. 36(7), pages 779-799.
    22. Álvaro Cartea & Thilo Meyer-Brandis, 2010. "How Duration Between Trades of Underlying Securities Affects Option Prices," Review of Finance, European Finance Association, vol. 14(4), pages 749-785.

    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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finmar:v:17:y:2014:i:c:p:1-46. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/finmar .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.