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An Improved Version of the Volume-Synchronized Probability of Informed Trading

Author

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  • Ke, Wen-Chyan
  • Lin, Hsiou-Wei William

Abstract

This study provides a theoretical basis for the transformation of the probability of informed trading model to the volume-synchronized probability of informed trading (VPIN) setting based on volume buckets. Building on Easley et al. (2011, 2012b), who derive the VPIN metric and provide evidence of its usefulness, we expand the analytical basis of the model and clarify its derivation. We show mathematically that Easley et al.’s VPIN metric becomes unstable for small volume buckets and for infrequent informed trades. In contrast, we use a maximum likelihood estimation to capture the information in volume time, and as a result our improved VPIN mathematical model generates consistent estimates. We also show that the volume time measure helps improve the predictability of VPIN for the flow toxicity.

Suggested Citation

  • Ke, Wen-Chyan & Lin, Hsiou-Wei William, 2017. "An Improved Version of the Volume-Synchronized Probability of Informed Trading," Critical Finance Review, now publishers, vol. 6(2), pages 357-376, September.
    • Handle: RePEc:now:jnlcfr:104.00000046
    DOI: 10.1561/104.00000046
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    Citations

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    Cited by:

    1. Yang, Haijun & Xue, Feng, 2021. "Analysis of stock market volatility: Adjusted VPIN with high-frequency data," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 210-222.
    2. Ke, Wen-Chyan & Chen, Hueiling & Lin, Hsiou-Wei William, 2019. "A note of techniques that mitigate floating-point errors in PIN estimation," Finance Research Letters, Elsevier, vol. 31(C).

    More about this item

    Keywords

    VPIN; PIN; High-frequency trading; Order flow toxicity;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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