Aiming at Pin: Order Flow, Information, and Liquidity
The Stephen M. Ross School of Business at the University of Michigan
University of Michigan at Ann Arbor
Indiana University Bloomington - Department of Finance
July 16, 2008
In this study, we model and measure the existence of informed trading. Specifically, we investigate the properties of the widely used measure of informed trading, PIN, developed by Easley and O'Hara, and establish three important features of informed trading. First, the existence of informed trading, and therefore PIN, should be estimated over different trading intervals for stocks of different characteristics. Second, we establish a direct relationship between PIN and the absolute (percentage) order imbalance (AIM). The latter is not only easier to measure, but can also be readily calculated over short horizons. Most importantly, we show that conditions for the theoretical equivalence between estimated PIN and AIM of a stock serve as a guide for the optimal estimation interval that should be used for that particular stock. Finally, and significantly, an investigation around exogenous national security events reveals strong evidence against interpreting PIN and order imbalance as a liquidity measure.
Number of Pages in PDF File: 33
Keywords: Stock Liquidity, Information Asymmetry, Information Content, Order Imbalance, PIN
JEL Classification: G12, G14working papers series
Date posted: January 2, 2006 ; Last revised: July 28, 2008
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