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VPIN and the Flash Crash: A rejoinder

Author

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  • Easley, David
  • López de Prado, Marcos M.
  • O'Hara, Maureen

Abstract

Andersen and Bondarenko's paper “VPIN and the Flash Crash” is essentially a comment on our 2011 Journal of Portfolio Management paper using our measure of order toxicity, VPIN. Andersen and Bondarenko dispute our empirical findings and argue that VPIN essentially does not work. This is incorrect, and is refuted by results in AB and by independent research. Far from “replicating” our results, AB attack a methodology we do not advocate, an analysis we never performed, and conclusions we did not draw. Our note here makes clear why microstructure features play an important role in understanding price dynamics.

Suggested Citation

  • Easley, David & López de Prado, Marcos M. & O'Hara, Maureen, 2014. "VPIN and the Flash Crash: A rejoinder," Journal of Financial Markets, Elsevier, vol. 17(C), pages 47-52.
    • Handle: RePEc:eee:finmar:v:17:y:2014:i:c:p:47-52
    DOI: 10.1016/j.finmar.2013.06.007
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    References listed on IDEAS

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    1. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(1), pages 109-126, March.
    2. Steffen Bohn, 2011. "The slippage paradox," Working Papers hal-00574268, HAL.
    3. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects," Journal of Finance, American Finance Association, vol. 45(1), pages 221-229, March.
    4. Steffen Bohn, 2011. "The slippage paradox," Papers 1103.2214, arXiv.org.
    5. David Easley & Marcos M. López de Prado & Maureen O'Hara, 2012. "Flow Toxicity and Liquidity in a High-frequency World," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1457-1493.
    6. Wu, Kesheng & Bethel, E. Wes & Gu, Ming & Leinweber, David & Rübe, Oliver, 2013. "A big data approach to analyzing market volatility," Algorithmic Finance, IOS Press, vol. 2(3-4), pages 241-267.
    7. Easley, David & O'Hara, Maureen, 1992. "Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
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    Cited by:

    1. Mengyu Zhang & Thanos Verousis & Iordanis Kalaitzoglou, 2022. "Information and the arrival rate of option trading volume," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(4), pages 605-644, April.
    2. David-Jan Jansen, 2019. "Did Spillovers From Europe Indeed Contribute to the 2010 U.S. Flash Crash?," DNB Working Papers 622, Netherlands Central Bank, Research Department.
    3. Abad, David & Massot, Magdalena & Pascual, Roberto, 2018. "Evaluating VPIN as a trigger for single-stock circuit breakers," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 21-36.
    4. Imtiaz Mohammad Sifat & Azhar Mohamad, 2019. "Circuit breakers as market stability levers: A survey of research, praxis, and challenges," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 1130-1169, July.
    5. Paparizos, Panagiotis & Dimitriou, Dimitrios & Kenourgios, Dimitris & Simos, Theodore, 2016. "On high frequency dynamics between information asymmetry and volatility for securities," The Journal of Economic Asymmetries, Elsevier, vol. 13(C), pages 21-34.
    6. Sifat, Imtiaz Mohammad & Mohamad, Azhar, 2020. "A survey on the magnet effect of circuit breakers in financial markets," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 138-151.
    7. Prodromou, Tina & Westerholm, P. Joakim, 2022. "Are high frequency traders responsible for extreme price movements?," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 94-111.
    8. Andersen, Torben G. & Bondarenko, Oleg, 2014. "Reflecting on the VPIN dispute," Journal of Financial Markets, Elsevier, vol. 17(C), pages 53-64.
    9. Yildiz, Serhat & Van Ness, Bonnie & Van Ness, Robert, 2020. "VPIN, liquidity, and return volatility in the U.S. equity markets," Global Finance Journal, Elsevier, vol. 45(C).
    10. Kyle Bechler & Mike Ludkovski, 2014. "Optimal Execution with Dynamic Order Flow Imbalance," Papers 1409.2618, arXiv.org, revised Oct 2014.
    11. Ulze, Markus & Stadler, Johannes & Rathgeber, Andreas W., 2021. "No country for old distributions? On the comparison of implied option parameters between the Brownian motion and variance gamma process," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 163-184.

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    More about this item

    Keywords

    Flash crash; Liquidity; Flow toxicity; Market microstructure; Probability of informed trading; VPIN;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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