IDEAS home Printed from https://ideas.repec.org/a/eee/glofin/v45y2020ics1044028318302679.html
   My bibliography  Save this article

VPIN, liquidity, and return volatility in the U.S. equity markets

Author

Listed:
  • Yildiz, Serhat
  • Van Ness, Bonnie
  • Van Ness, Robert

Abstract

We examine the volume-synchronized probability of informed trading metric (the VPIN flow toxicity metric, developed by Easley, Lopez de Prado, & O'Hara, 2012) as a real-time risk management tool for liquidity deteriorations in the U.S. equity markets. We find that VPIN provides information about market liquidity and stock return volatility on ex-ante basis. These results indicate that VPIN can be a useful risk-management tool for market makers, regulators and traders in the U.S. equity markets. We also document that VPIN is negatively associated with volume and number of trades, but positively associated with trade size and volume fragmentation. These findings suggest that VPIN indicates the adverse selection problem of liquidity providers by capturing the information in volume.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:glofin:v:45:y:2020:i:c:s1044028318302679
    DOI: 10.1016/j.gfj.2019.100479
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1044028318302679
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.gfj.2019.100479?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 search for a different version of it.

    References listed on IDEAS

    as
    1. Dow, James & Gorton, Gary, 1997. "Stock Market Efficiency and Economic Efficiency: Is There a Connection?," Journal of Finance, American Finance Association, vol. 52(3), pages 1087-1129, July.
    2. Bessembinder, Hendrik, 2003. "Issues in assessing trade execution costs," Journal of Financial Markets, Elsevier, vol. 6(3), pages 233-257, May.
    3. 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.
    4. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    5. Upson, James & Van Ness, Robert A., 2017. "Multiple markets, algorithmic trading, and market liquidity," Journal of Financial Markets, Elsevier, vol. 32(C), pages 49-68.
    6. McInish, Thomas H & Wood, Robert A, 1992. "An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks," Journal of Finance, American Finance Association, vol. 47(2), pages 753-764, June.
    7. 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.
    8. Andrew J. Patton & Michela Verardo, 2012. "Does Beta Move with News? Firm-Specific Information Flows and Learning about Profitability," The Review of Financial Studies, Society for Financial Studies, vol. 25(9), pages 2789-2839.
    9. Ekkehart Boehmer & Robert Jennings & Li Wei, 2007. "Public Disclosure and Private Decisions: Equity Market Execution Quality and Order Routing," The Review of Financial Studies, Society for Financial Studies, vol. 20(2), pages 315-358.
    10. Bessembinder, Hendrik & Chan, Kalok & Seguin, Paul J., 1996. "An empirical examination of information, differences of opinion, and trading activity," Journal of Financial Economics, Elsevier, vol. 40(1), pages 105-134, January.
    11. Andersen, Torben G. & Bondarenko, Oleg, 2014. "VPIN and the flash crash," Journal of Financial Markets, Elsevier, vol. 17(C), pages 1-46.
    12. James Dow, 2003. "Informed Trading, Investment, and Welfare," The Journal of Business, University of Chicago Press, vol. 76(3), pages 439-454, July.
    13. Hasbrouck, Joel, 2007. "Empirical Market Microstructure: The Institutions, Economics, and Econometrics of Securities Trading," OUP Catalogue, Oxford University Press, number 9780195301649.
    14. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    15. Jiang, Christine X. & Likitapiwat, Tanakorn & McInish, Thomas H., 2012. "Information Content of Earnings Announcements: Evidence from After-Hours Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(6), pages 1303-1330, December.
    16. Thierry Foucault & Albert J. Menkveld, 2008. "Competition for Order Flow and Smart Order Routing Systems," Journal of Finance, American Finance Association, vol. 63(1), pages 119-158, February.
    17. William M. Cheung & Robin K. Chou & Adrian C.H. Lei, 2015. "Exchange‐Traded Barrier Option and VPIN: Evidence from Hong Kong," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(6), pages 561-581, June.
    18. O'Hara, Maureen & Ye, Mao, 2011. "Is market fragmentation harming market quality?," Journal of Financial Economics, Elsevier, vol. 100(3), pages 459-474, June.
    19. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 805-835.
    20. 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.
    21. 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.
    22. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2008. "Liquidity and market efficiency," Journal of Financial Economics, Elsevier, vol. 87(2), pages 249-268, February.
    23. Berkman, Henk & Brailsford, Tim & Frino, Alex, 2005. "A note on execution costs for stock index futures: Information versus liquidity effects," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 565-577, March.
    24. Bonnie F. Van Ness & Robert A. Van Ness & Serhat Yildiz, 2017. "The role of HFTs in order flow toxicity and stock price variance, and predicting changes in HFTs’ liquidity provisions," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(4), pages 739-762, October.
    25. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    26. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
    27. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
    28. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, February.
    29. Yen-Hsien Lee & Wen-Chien Liu & Chia-Lin Hsieh, 2017. "Informed Trading of Futures Markets During the Financial Crisis: Evidence from the VPIN," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(9), pages 123-132, September.
    30. Yoshihiro Kitamura, 2017. "Predicting a flash crash in the yen/dollar foreign exchange market," Applied Economics Letters, Taylor & Francis Journals, vol. 24(14), pages 987-990, August.
    31. 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.
    32. Jones, Charles M. & Kaul, Gautam & Lipson, Marc L., 1994. "Information, trading, and volatility," Journal of Financial Economics, Elsevier, vol. 36(1), pages 127-154, August.
    33. Leland, Hayne E, 1992. "Insider Trading: Should It Be Prohibited?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 859-887, August.
    34. Subrahmanyam, Avanidhar, 1991. "A Theory of Trading in Stock Index Futures," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 17-51.
    35. Jeff Fleming & Chris Kirby & Barbara Ostdiek, 2006. "Information, Trading, and Volatility: Evidence from Weather‐Sensitive Markets," Journal of Finance, American Finance Association, vol. 61(6), pages 2899-2930, December.
    36. 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.
    37. Barclay, Michael J & Litzenberger, Robert H & Warner, Jerold B, 1990. "Private Information, Trading Volume, and Stock-Return Variances," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 233-253.
    38. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, April.
    39. Easley, David, et al, 1996. "Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
    40. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    41. Goyenko, Ruslan Y. & Holden, Craig W. & Trzcinka, Charles A., 2009. "Do liquidity measures measure liquidity?," Journal of Financial Economics, Elsevier, vol. 92(2), pages 153-181, May.
    42. Chan, Louis K. C. & Lakonishok, Josef, 1993. "Institutional trades and intraday stock price behavior," Journal of Financial Economics, Elsevier, vol. 33(2), pages 173-199, April.
    43. Johan Bjursell & George H. K. Wang & Hui Zheng, 2017. "VPIN, Jump Dynamics and Inventory Announcements in Energy Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(6), pages 542-577, June.
    44. Stoll, Hans R & Whaley, Robert E, 1990. "Stock Market Structure and Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 37-71.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Qingjing Zhang & Taufiq Choudhry & Jing-Ming Kuo & Xiaoquan Liu, 2021. "Does liquidity drive stock market returns? The role of investor risk aversion," Review of Quantitative Finance and Accounting, Springer, vol. 57(3), pages 929-958, October.
    2. 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.
    3. Zhang, Pengcheng & Kong, Deli & Xu, Kunpeng & Qi, Jiayin, 2024. "Global economic policy uncertainty and the stability of cryptocurrency returns: The role of liquidity volatility," Research in International Business and Finance, Elsevier, vol. 67(PB).
    4. Carè, Rosella & Cumming, Douglas, 2024. "Technology and automation in financial trading: A bibliometric review," Research in International Business and Finance, Elsevier, vol. 71(C).
    5. Yang Gao & Chengjie Zhao & Bianxia Sun & Wandi Zhao, 2022. "Effects of investor sentiment on stock volatility: new evidences from multi-source data in China’s green stock markets," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-30, December.

    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. Van Ness, Bonnie & Van Ness, Robert & Yildiz, Serhat, 2021. "Private information in trades, R2, and large stock price movements," Journal of Banking & Finance, Elsevier, vol. 131(C).
    2. Hatheway, Frank & Kwan, Amy & Zheng, Hui, 2017. "An Empirical Analysis of Market Segmentation on U.S. Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2399-2427, December.
    3. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    4. Ibikunle, Gbenga & Aquilina, Matteo & Diaz-Rainey, Ivan & Sun, Yuxin, 2021. "City goes dark: Dark trading and adverse selection in aggregate markets," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 1-22.
    5. 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.
    6. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    7. Patrick J. Kelly, 2014. "Information Efficiency and Firm-Specific Return Variation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-44.
    8. Mazza, Paolo, 2015. "Price dynamics and market liquidity: An intraday event study on Euronext," The Quarterly Review of Economics and Finance, Elsevier, vol. 56(C), pages 139-153.
    9. Rzayev, Khaladdin & Ibikunle, Gbenga, 2019. "A state-space modeling of the information content of trading volume," Journal of Financial Markets, Elsevier, vol. 46(C).
    10. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    11. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017, January-A.
    12. Ibikunle, Gbenga, 2018. "Trading places: Price leadership and the competition for order flow," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 178-200.
    13. repec:uts:finphd:34 is not listed on IDEAS
    14. Goodhart, Charles A. E. & O'Hara, Maureen, 1997. "High frequency data in financial markets: Issues and applications," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 73-114, June.
    15. Chang, Sanders S. & Wang, F. Albert, 2015. "Adverse selection and the presence of informed trading," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 19-33.
    16. Lof, Matthijs & van Bommel, Jos, 2023. "Asymmetric information and the distribution of trading volume," Journal of Corporate Finance, Elsevier, vol. 82(C).
    17. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 27, July-Dece.
    18. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity -- Theory and Empirical Evidence," NBER Working Papers 18251, National Bureau of Economic Research, Inc.
    19. Lei, Qin & Wu, Guojun, 2005. "Time-varying informed and uninformed trading activities," Journal of Financial Markets, Elsevier, vol. 8(2), pages 153-181, May.
    20. Nyborg, Kjell & Wang, Zexi, 2013. "Stock Liquidity and Corporate Cash Holdings," CEPR Discussion Papers 9535, C.E.P.R. Discussion Papers.
    21. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 6-2015, January-A.

    More about this item

    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:glofin:v:45:y:2020:i:c:s1044028318302679. 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/inca/620162 .

    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.