VPIN and the Flash Crash
Torben G. Andersen
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); University of Aarhus - CREATES
University of Illinois at Chicago - Department of Finance
October 11, 2011
The VPIN, or Volume-Synchronized Probability of INformed trading, metric is introduced by Easley, Lopez de Prado and O'Hara as a real-time indicator of order flow toxicity. They find the measure useful in monitoring order flow imbalances and conclude it may help signal impending market turmoil, exemplified by historical high readings of the metric prior to the flash crash. More generally, they show that VPIN is significantly correlated with future short-term return volatility. In contrast, our empirical investigation of VPIN documents that it is a poor predictor of short run volatility, that it did not reach an all-time high prior, but rather after, the flash crash, and that its predictive content is due primarily to a mechanical relation with the underlying trading intensity. Preliminary experimentation suggests that signed order flow indicators may contain useful information for gauging real-time market stress indicators. Nonetheless, we caution against the adoption on any specific metric until its performance has been compared thoroughly to suitable benchmarks, including the type of analysis we undertake in the present paper.
Number of Pages in PDF File: 38
Keywords: VPIN, PIN, High-Frequency Trading, Order Flow Toxicity, Order Imbalance, Flash Crash, VIX, Volatility Forecasting
JEL Classification: G01, G12, G14, G17, C58working papers series
Date posted: July 9, 2011 ; Last revised: October 12, 2011
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