Time-Varying Arrival Rates of Informed and Uninformed Trades

Posted: 10 Jul 2008

See all articles by David Easley

David Easley

Cornell University - Department of Economics; Cornell University - Department of Information Science

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: Spring 2008

Abstract

We propose a dynamic econometric microstructure model of trading, and we investigate how the dynamics of trades and trade composition interact with the evolution of market liquidity, market depth, and order flow. We estimate a bivariate generalized autoregressive intensity process for the arrival rates of informed and uninformed trades for 16 actively traded stocks over 15 years of transaction data. Our results show that both informed and uninformed trades are highly persistent, but that the uninformed arrival forecasts respond negatively to past forecasts of the informed intensity. Our estimation generates daily conditional arrival rates of informed and uninformed trades, which we use to construct forecasts of the probability of information-based trade (PIN). These forecasts are used in turn to forecast market liquidity as measured by bid-ask spreads and the price impact of orders. We observe that PINs vary across assets and over time, and most importantly that they are correlated across assets. Our analysis shows that one principal component explains much of the daily variation in PINs and that this systemic liquidity factor may be important for asset pricing. We also find that PINs tend to rise before earnings announcement days and decline afterwards.

Keywords: C51, C53, G10, G12, G14, Arrival rates, informed trades, uninformed trades, autoregressive process, market depth, liquidity

Suggested Citation

Easley, David and Engle, Robert F. and O'Hara, Maureen and Wu, Liuren, Time-Varying Arrival Rates of Informed and Uninformed Trades (Spring 2008). Journal of Financial Econometrics, Vol. 6, Issue 2, pp. 171-207, 2008. Available at SSRN: https://ssrn.com/abstract=1157744 or http://dx.doi.org/nbn003

David Easley (Contact Author)

Cornell University - Department of Economics ( email )

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Cornell University - Department of Information Science ( email )

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Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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New York University (NYU) - Department of Finance

Stern School of Business
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National Bureau of Economic Research (NBER)

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Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
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607-255-5993 (Fax)

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business ( email )

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Box B10-247
New York, NY 10010
United States
646-312-3509 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://faculty.baruch.cuny.edu/lwu/

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