IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v47y2016i4d10.1007_s11156-015-0535-z.html
   My bibliography  Save this article

A PIN per day shows what news convey: the intraday probability of informed trading

Author

Listed:
  • Thomas Pöppe

    (Technische Universität Darmstadt)

  • Michael Aitken

    (Capital Markets CRC Ltd.)

  • Dirk Schiereck

    (Technische Universität Darmstadt)

  • Ingo Wiegand

    (Stanford University)

Abstract

This paper develops a new intraday estimation procedure for the sequential microstructure trading model initially proposed by Easley et al. (Rev Financ Stud 10:805–835, 1997a). Using a full year of intraday trading data for the top 100 German stocks, we demonstrate how the new estimation procedure eliminates or significantly reduces the shortcomings of the original approach in recent, high-frequency trading environments. We slice a trading day in buckets of several minutes’ length to obtain one estimate of the composite variable probability of informed trading (PIN) per day. This approach makes PIN applicable in short horizon event studies. Convergence rates are above 95 % even for the most liquid stocks and the model’s underlying assumptions of independence for the arrival of traders and information events are fulfilled to a much higher degree than in the original approach. An empirical application in an event study type setting demonstrates how official announcements stipulated in German insider trading legislation significantly reduce information asymmetry upon public disclosure.

Suggested Citation

  • Thomas Pöppe & Michael Aitken & Dirk Schiereck & Ingo Wiegand, 2016. "A PIN per day shows what news convey: the intraday probability of informed trading," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1187-1220, November.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:4:d:10.1007_s11156-015-0535-z
    DOI: 10.1007/s11156-015-0535-z
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-015-0535-z
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-015-0535-z?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. Grammig, Joachim & Theissen, Erik & Wuensche, Oliver, 2007. "Time and price impact of a trade: A structural approach," CFR Working Papers 07-12, University of Cologne, Centre for Financial Research (CFR).
    2. Hasbrouck, Joel, 1991. "Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    3. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, February.
    4. 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.
    5. Alfonso Dufour & Robert F. Engle, 2000. "Time and the Price Impact of a Trade," Journal of Finance, American Finance Association, vol. 55(6), pages 2467-2498, December.
    6. 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.
    7. 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.
    8. Green, T. Clifton, 2006. "The Value of Client Access to Analyst Recommendations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(1), pages 1-24, March.
    9. Kim, Sok Tae & Lin, Ji-Chai & Slovin, Myron B., 1997. "Market Structure, Informed Trading, and Analysts' Recommendations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(4), pages 507-524, December.
    10. Easley, David & O'Hara, Maureen & Paperman, Joseph, 1998. "Financial analysts and information-based trade," Journal of Financial Markets, Elsevier, vol. 1(2), pages 175-201, August.
    11. Andersen, Torben G. & Bondarenko, Oleg, 2014. "VPIN and the flash crash," Journal of Financial Markets, Elsevier, vol. 17(C), pages 1-46.
    12. Muntermann, Jan & Guettler, Andre, 2007. "Intraday stock price effects of ad hoc disclosures: the German case," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(1), pages 1-24, February.
    13. Lei, Qin & Wu, Guojun, 2005. "Time-varying informed and uninformed trading activities," Journal of Financial Markets, Elsevier, vol. 8(2), pages 153-181, May.
    14. Easley, David & O'Hara, Maureen & Saar, Gideon, 2001. "How Stock Splits Affect Trading: A Microstructure Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 25-51, March.
    15. Busse, Jeffrey A. & Clifton Green, T., 2002. "Market efficiency in real time," Journal of Financial Economics, Elsevier, vol. 65(3), pages 415-437, September.
    16. Alexandra Hachmeister & Dirk Schiereck, 2010. "Dancing in the dark: post-trade anonymity, liquidity and informed trading," Review of Quantitative Finance and Accounting, Springer, vol. 34(2), pages 145-177, February.
    17. David Easley & Robert F. Engle & Maureen O'Hara & Liuren Wu, 2008. "Time-Varying Arrival Rates of Informed and Uninformed Trades," Journal of Financial Econometrics, Oxford University Press, vol. 6(2), pages 171-207, Spring.
    18. Nuno Fernandes & Miguel A. Ferreira, 2009. "Insider Trading Laws and Stock Price Informativeness," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1845-1887, May.
    19. 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.
    20. Grammig, Joachim & Schiereck, Dirk & Theissen, Erik, 2001. "Knowing me, knowing you: : Trader anonymity and informed trading in parallel markets," Journal of Financial Markets, Elsevier, vol. 4(4), pages 385-412, October.
    21. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    22. Aktas, Nihat & de Bodt, Eric & Declerck, Fany & Van Oppens, Herve, 2007. "The PIN anomaly around M&A announcements," Journal of Financial Markets, Elsevier, vol. 10(2), pages 169-191, May.
    23. Miao Luo & Tao Chen & Isabel Yan, 2014. "Price informativeness and institutional ownership: evidence from Japan," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 627-651, May.
    24. Huang, Roger D & Stoll, Hans R, 1997. "The Components of the Bid-Ask Spread: A General Approach," The Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 995-1034.
    25. 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.
    26. Akay, Ozgur (Ozzy) & Cyree, Ken B. & Griffiths, Mark D. & Winters, Drew B., 2012. "What does PIN identify? Evidence from the T-bill market," Journal of Financial Markets, Elsevier, vol. 15(1), pages 29-46.
    27. Jackson, David, 2013. "Estimating PIN for firms with high levels of trading," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 116-120.
    28. Raman Kumar & Marius Popescu, 2014. "The implied intra-day probability of informed trading," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 357-371, February.
    29. 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.
    30. 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.
    31. 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.
    32. Anthony Tay & Christopher Ting & Yiu Kuen Tse & Mitch Warachka, 2009. "Using High-Frequency Transaction Data to Estimate the Probability of Informed Trading," Journal of Financial Econometrics, Oxford University Press, vol. 7(3), pages 288-311, Summer.
    33. Hachmeister, A. & Schiereck, D., 2010. "Dancing in the Dark: Post-trade Anonymity, Liquidity, and Informed Trading," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 34883, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    34. 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.
    35. Pierre Collin-Dufresne & Vyacheslav Fos, 2012. "Do prices reveal the presence of informed trading?," NBER Working Papers 18452, National Bureau of Economic Research, Inc.
    36. Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, vol. 82(1), pages 103-133, October.
    37. Easley, David, et al, 1996. "Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
    38. Charles Chang & Emily Lin, 2014. "On the Determinants of Basis Spread for Taiwan Index Futures and the Role of Speculators," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-30.
    39. William Cheung & Kejing Liu, 2014. "A Comparison of China's Main Board and Growth Enterprise Market Board — Market Microstructure Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(02), pages 1-29.
    40. 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.
    41. Heidle, Hans G. & Huang, Roger D., 2002. "Information-Based Trading in Dealer and Auction Markets: An Analysis of Exchange Listings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(3), pages 391-424, September.
    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. Cosmin Octavian Cepoi & Victor Dragotă & Ruxandra Trifan & Andreea Iordache, 2023. "Probability of informed trading during the COVID-19 pandemic: the case of the Romanian stock market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, 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. 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. repec:zbw:bofrdp:2018_001 is not listed on IDEAS
    4. Lof, Matthijs & van Bommel, Jos, 2023. "Asymmetric information and the distribution of trading volume," Journal of Corporate Finance, Elsevier, vol. 82(C).
    5. Agudelo, Diego A. & Giraldo, Santiago & Villarraga, Edwin, 2015. "Does PIN measure information? Informed trading effects on returns and liquidity in six emerging markets," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 149-161.
    6. 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.
    7. Griffin, Jim & Oberoi, Jaideep & Oduro, Samuel D., 2021. "Estimating the probability of informed trading: A Bayesian approach," Journal of Banking & Finance, Elsevier, vol. 125(C).
    8. Lamoureux, Christopher G. & Wang, Qin, 2015. "Measuring private information in a specialist market," Journal of Empirical Finance, Elsevier, vol. 30(C), pages 92-119.
    9. 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.
    10. 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.
    11. repec:uts:finphd:34 is not listed on IDEAS
    12. 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.
    13. Sun, Yuxin & Ibikunle, Gbenga, 2017. "Informed trading and the price impact of block trades: A high frequency trading analysis," International Review of Financial Analysis, Elsevier, vol. 54(C), pages 114-129.
    14. 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.
    15. Cosmin Octavian Cepoi & Victor Dragotă & Ruxandra Trifan & Andreea Iordache, 2023. "Probability of informed trading during the COVID-19 pandemic: the case of the Romanian stock market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, December.
    16. 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.
    17. 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.
    18. Sankaraguruswamy, Srinivasan & Shen, Jianfeng & Yamada, Takeshi, 2013. "The relationship between the frequency of news release and the information asymmetry: The role of uninformed trading," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4134-4143.
    19. 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.
    20. Ping-Chen Tsai & Chi-Ming Tsai, 2021. "Estimating the proportion of informed and speculative traders in financial markets: evidence from exchange rate," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(3), pages 443-470, July.
    21. 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.
    22. Ripamonti, Alexandre, 2016. "Corwin-Schultz bid-ask spread estimator in the Brazilian stock market," MPRA Paper 79459, University Library of Munich, Germany.
    23. Aktas, Nihat & de Bodt, Eric & Declerck, Fany & Van Oppens, Herve, 2007. "The PIN anomaly around M&A announcements," Journal of Financial Markets, Elsevier, vol. 10(2), pages 169-191, May.

    More about this item

    Keywords

    Capital markets; Probability of informed trading; Information asymmetry; High-frequency trading; Insider trading regulation;
    All these keywords.

    JEL classification:

    • 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:kap:rqfnac:v:47:y:2016:i:4:d:10.1007_s11156-015-0535-z. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    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.