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The probability of informed trading measured with price impact, price reversal, and volatility

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  • Kitamura, Yoshihiro

Abstract

Contemporaneous and positive correlation between order flow and exchange rate is a stylized fact. I postulate that the order flow driven by informed trading has a significant price impact. I also do that little price reversal occurs in the subsequent period. The Markov-switching model provides probabilities of a significant price impact and little price reversal. I apply these probabilities to measure the probability of informed trading. The measure explains a greater share of the random walk component of price compared to other measures offered by previous studies.

Suggested Citation

  • Kitamura, Yoshihiro, 2016. "The probability of informed trading measured with price impact, price reversal, and volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 77-90.
  • Handle: RePEc:eee:intfin:v:42:y:2016:i:c:p:77-90
    DOI: 10.1016/j.intfin.2016.02.001
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