Abstract

http://ssrn.com/abstract=1695596
 
 

References (37)



 
 

Citations (21)



 


 



Flow Toxicity and Liquidity in a High Frequency World


David Easley


Cornell University - Department of Economics

Marcos Lopez de Prado


Guggenheim Partners, LLC; Lawrence Berkeley National Laboratory; RCC at Harvard University

Maureen O'Hara


Cornell University - Samuel Curtis Johnson Graduate School of Management

February 20, 2012

Review of Financial Studies, Vol. 25, No. 5, pp. 1457-1493, 2012.

Abstract:     
Order flow is toxic when it adversely selects market makers, who may be unaware they are providing liquidity at a loss. We present a new procedure to estimate flow toxicity based on volume imbalance and trade intensity (the VPIN toxicity metric). VPIN is updated in volume-time, making it applicable to the high frequency world, and it does not require the intermediate estimation of non-observable parameters or the application of numerical methods. It does require trades classified as buys or sells, and we develop a new bulk volume classification procedure that we argue is more useful in high frequency markets than standard classification procedures. We show that the VPIN metric is a useful indicator of short-term, toxicity-induced volatility.

Number of Pages in PDF File: 71

Keywords: Flash crash, liquidity, flow toxicity, volume imbalance, market microstructure, probability of informed trading, VPIN

JEL Classification: C02, D52, D53, G14

Accepted Paper Series


Download This Paper

Date posted: October 23, 2010 ; Last revised: April 15, 2012

Suggested Citation

Easley, David and Lopez de Prado, Marcos and O'Hara, Maureen, Flow Toxicity and Liquidity in a High Frequency World (February 20, 2012). Review of Financial Studies, Vol. 25, No. 5, pp. 1457-1493, 2012.. Available at SSRN: http://ssrn.com/abstract=1695596 or http://dx.doi.org/10.2139/ssrn.1695596

Contact Information

David Easley (Contact Author)
Cornell University - Department of Economics ( email )
414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)
Marcos Lopez de Prado
Guggenheim Partners, LLC ( email )
330 Madison Avenue
New York, NY 10017
United States
HOME PAGE: http://www.QuantResearch.info
Lawrence Berkeley National Laboratory ( email )
One Cyclotron Road
Berkeley, CA 94720
United States
HOME PAGE: http://www.lbl.gov
RCC at Harvard University ( email )
26 Trowbridge Street
Cambridge, MA 02138
United States
HOME PAGE: http://www.rcc.harvard.edu
Maureen O'Hara
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 33,885
Downloads: 14,878
Download Rank: 87
References:  37
Citations:  21

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.453 seconds