IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v43y2014icp137-149.html
   My bibliography  Save this article

Quality of PIN estimates and the PIN-return relationship

Author

Listed:
  • Yan, Yuxing
  • Zhang, Shaojun

Abstract

This paper provides new evidence concerning the probability of informed trading (PIN) and the PIN-return relationship. We take measures to overcome known estimation biases and improve the quality of quarterly PIN estimates. We use the average of a firm’s PIN estimates in four consecutive quarters to smooth out the effect of seasonal variation in trading activities. We find that when high-quality PIN estimates are used, the Fama–MacBeth cross-sectional regressions show stronger evidence for the positive PIN-return relationship than documented in the prior literature. This finding is robust to controls for the January, liquidity, and momentum effects.

Suggested Citation

  • Yan, Yuxing & Zhang, Shaojun, 2014. "Quality of PIN estimates and the PIN-return relationship," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 137-149.
    • Handle: RePEc:eee:jbfina:v:43:y:2014:i:c:p:137-149
    DOI: 10.1016/j.jbankfin.2014.03.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426614000892
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2014.03.006?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. 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.
    2. Chen, Yifan & Zhao, Huainan, 2012. "Informed trading, information uncertainty, and price momentum," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2095-2109.
    3. Mohanram, Partha & Rajgopal, Shiva, 2009. "Is PIN priced risk?," Journal of Accounting and Economics, Elsevier, vol. 47(3), pages 226-243, June.
    4. Elizabeth R. Odders-White & Mark J. Ready, 2006. "Credit Ratings and Stock Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 119-157.
    5. Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    6. Easley, David & Hvidkjaer, Soeren & O’Hara, Maureen, 2010. "Factoring Information into Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(2), pages 293-309, April.
    7. Duarte, Jefferson & Han, Xi & Harford, Jarrad & Young, Lance, 2008. "Information asymmetry, information dissemination and the effect of regulation FD on the cost of capital," Journal of Financial Economics, Elsevier, vol. 87(1), pages 24-44, January.
    8. 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.
    9. Kent Daniel & Sheridan Titman, 2006. "Market Reactions to Tangible and Intangible Information," Journal of Finance, American Finance Association, vol. 61(4), pages 1605-1643, August.
    10. 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.
    11. Litzenberger, Robert H. & Ramaswamy, Krishna, 1979. "The effect of personal taxes and dividends on capital asset prices : Theory and empirical evidence," Journal of Financial Economics, Elsevier, vol. 7(2), pages 163-195, June.
    12. Grinblatt, Mark & Moskowitz, Tobias J., 2004. "Predicting stock price movements from past returns: the role of consistency and tax-loss selling," Journal of Financial Economics, Elsevier, vol. 71(3), pages 541-579, March.
    13. Grundy, Bruce D & Martin, J Spencer, 2001. "Understanding the Nature of the Risks and the," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 29-78.
    14. 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.
    15. Boehmer, Ekkehart & Grammig, Joachim & Theissen, Erik, 2007. "Estimating the probability of informed trading--does trade misclassification matter?," Journal of Financial Markets, Elsevier, vol. 10(1), pages 26-47, February.
    16. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    17. repec:bla:jfinan:v:59:y:2004:i:4:p:1553-1583 is not listed on IDEAS
    18. Odders-White, Elizabeth R., 2000. "On the occurrence and consequences of inaccurate trade classification," Journal of Financial Markets, Elsevier, vol. 3(3), pages 259-286, August.
    19. 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.
    20. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    21. James M. Poterba & Scott J. Weisbenner, 2001. "Capital Gains Tax Rules, Tax‐loss Trading, and Turn‐of‐the‐year Returns," Journal of Finance, American Finance Association, vol. 56(1), pages 353-368, February.
    22. Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2005. "The market pricing of accruals quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 295-327, June.
    23. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    24. Duarte, Jefferson & Young, Lance, 2009. "Why is PIN priced?," Journal of Financial Economics, Elsevier, vol. 91(2), pages 119-138, February.
    25. Bessembinder, Hendrik, 2003. "Issues in assessing trade execution costs," Journal of Financial Markets, Elsevier, vol. 6(3), pages 233-257, May.
    26. Brown, Stephen & Hillegeist, Stephen A. & Lo, Kin, 2004. "Conference calls and information asymmetry," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 343-366, September.
    27. Finucane, Thomas J., 2000. "A Direct Test of Methods for Inferring Trade Direction from Intra-Day Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(4), pages 553-576, December.
    28. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    29. Jegadeesh, Narasimhan, 1990. "Evidence of Predictable Behavior of Security Returns," Journal of Finance, American Finance Association, vol. 45(3), pages 881-898, July.
    30. Henker, Thomas & Wang, Jian-Xin, 2006. "On the importance of timing specifications in market microstructure research," Journal of Financial Markets, Elsevier, vol. 9(2), pages 162-179, May.
    31. Yan, Yuxing & Zhang, Shaojun, 2012. "An improved estimation method and empirical properties of the probability of informed trading," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 454-467.
    32. Brockman, Paul & Yan, Xuemin (Sterling), 2009. "Block ownership and firm-specific information," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 308-316, February.
    33. William Lin, Hsiou-Wei & Ke, Wen-Chyan, 2011. "A computing bias in estimating the probability of informed trading," Journal of Financial Markets, Elsevier, vol. 14(4), pages 625-640, November.
    34. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    35. Ellis, Katrina & Michaely, Roni & O'Hara, Maureen, 2000. "The Accuracy of Trade Classification Rules: Evidence from Nasdaq," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(4), pages 529-551, December.
    36. Peterson, Mark & Sirri, Erik, 2003. "Evaluation of the biases in execution cost estimation using trade and quote data," Journal of Financial Markets, Elsevier, vol. 6(3), pages 259-280, May.
    37. Kang, Moonsoo, 2010. "Probability of information-based trading and the January effect," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2985-2994, December.
    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. Ersan, Oguz & Alıcı, Aslı, 2016. "An unbiased computation methodology for estimating the probability of informed trading (PIN)," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 43(C), pages 74-94.
    2. Oguz Ersan & Montasser Ghachem, 2024. "Identifying Information Types in the Estimation of Informed Trading: An Improved Algorithm," JRFM, MDPI, vol. 17(9), pages 1-20, September.
    3. Adra, Samer & Barbopoulos, Leonidas G., 2023. "The informational consequences of good and bad mergers," Journal of Corporate Finance, Elsevier, vol. 78(C).
    4. Schreder, Max, 2018. "Idiosyncratic information and the cost of equity capital: A meta-analytic review of the literature," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 142-172.
    5. Adra, Samer & Barbopoulos, Leonidas G., 2020. "Do corporations learn from mispricing? Evidence from takeovers and corporate performance," International Review of Financial Analysis, Elsevier, vol. 68(C).
    6. Quan Gan & Wang Chun Wei & David Johnstone, 2015. "A faster estimation method for the probability of informed trading using hierarchical agglomerative clustering," Quantitative Finance, Taylor & Francis Journals, vol. 15(11), pages 1805-1821, November.

    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. Lof, Matthijs & Bommel, Jos van, 2018. "Asymmetric information and the distribution of trading volume," Research Discussion Papers 1, Bank of Finland.
    2. repec:zbw:bofrdp:001 is not listed on IDEAS
    3. Michael J. Brennan & Sahn-Wook Huh & Avanidhar Subrahmanyam, 2016. "Asymmetric Effects of Informed Trading on the Cost of Equity Capital," Management Science, INFORMS, vol. 62(9), pages 2460-2480, September.
    4. repec:zbw:bofrdp:2018_001 is not listed on IDEAS
    5. Aslan, Hadiye & Easley, David & Hvidkjaer, Soeren & O'Hara, Maureen, 2011. "The characteristics of informed trading: Implications for asset pricing," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 782-801.
    6. Lof, Matthijs & van Bommel, Jos, 2023. "Asymmetric information and the distribution of trading volume," Journal of Corporate Finance, Elsevier, vol. 82(C).
    7. Ersan, Oguz & Alıcı, Aslı, 2016. "An unbiased computation methodology for estimating the probability of informed trading (PIN)," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 43(C), pages 74-94.
    8. Bardong, Florian & Bartram, Söhnke M. & Yadav, Pradeep K., 2005. "Informed Trading, Information Asymmetry and Pricing of Information Risk: Empirical Evidence from the NYSE," MPRA Paper 13586, University Library of Munich, Germany, revised 10 Oct 2008.
    9. Schreder, Max, 2018. "Idiosyncratic information and the cost of equity capital: A meta-analytic review of the literature," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 142-172.
    10. Gordon, Narelle & Watts, Edward & Wu, Qiongbing, 2014. "Information attributes, information asymmetry and industry sector returns," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 156-175.
    11. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    12. Hoang Luong Luong & Huong Giang (Lily) Nguyen & Xiangkang Yin, 2015. "When Is a Firm's Information Asymmetry Priced? The Role of Institutional Investors," International Review of Finance, International Review of Finance Ltd., vol. 15(1), pages 55-88, March.
    13. Yan, Yuxing & Zhang, Shaojun, 2012. "An improved estimation method and empirical properties of the probability of informed trading," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 454-467.
    14. Mohanram, Partha & Rajgopal, Shiva, 2009. "Is PIN priced risk?," Journal of Accounting and Economics, Elsevier, vol. 47(3), pages 226-243, June.
    15. Moonsoo Kang & Kiseok Nam, 2015. "Informed trade and idiosyncratic return variation," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 551-572, April.
    16. Sadka, Ronnie, 2006. "Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk," Journal of Financial Economics, Elsevier, vol. 80(2), pages 309-349, May.
    17. Hwang, Lee-Seok & Lee, Woo-Jong & Lim, Seung-Yeon & Park, Kyung-Ho, 2013. "Does information risk affect the implied cost of equity capital? An analysis of PIN and adjusted PIN," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 148-167.
    18. Petchey, James & Wee, Marvin & Yang, Joey, 2016. "Pinning down an effective measure for probability of informed trading," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 456-475.
    19. Cederburg, Scott & O’Doherty, Michael S. & Wang, Feifei & Yan, Xuemin (Sterling), 2020. "On the performance of volatility-managed portfolios," Journal of Financial Economics, Elsevier, vol. 138(1), pages 95-117.
    20. Katsuhiko Muramiya & Kazuhisa Otogawa & Tomomi Takada, 2008. "Abnormal Accrual, Informed Trader, and Long-Term Stock Return: Evidence from Japan," Discussion Paper Series 233, Research Institute for Economics & Business Administration, Kobe University.
    21. Kang, Moonsoo, 2010. "Probability of information-based trading and the January effect," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2985-2994, December.
    22. Tarun Chordia & Jianfeng Hu & Avanidhar Subrahmanyam & Qing Tong, 2019. "Order Flow Volatility and Equity Costs of Capital," Management Science, INFORMS, vol. 65(4), pages 1520-1551, April.

    More about this item

    Keywords

    Probability of informed trading; PIN-return relationship; Quality of PIN estimates;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    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:jbfina:v:43:y:2014:i:c:p:137-149. 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/jbf .

    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.