VPIN and the Flash Crash

44 Pages Posted: 9 Jul 2011 Last revised: 18 Feb 2014

Torben G. Andersen

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); University of Aarhus - CREATES

Oleg Bondarenko

University of Illinois at Chicago - Department of Finance

Date Written: May 8, 2013

Abstract

The Volume-Synchronized Probability of Informed trading (VPIN) metric is introduced by Easley, Lopez de Prado, and O'Hara (2011a) 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. We also investigate a later incarnation of VPIN, stemming from Easley, Lopez de Prado, and O'Hara (2012a), and reach similar conclusions. In general, we stress that adoption of any specific metric for order flow toxicity should be contingent on satisfactory performance relative to suitable benchmarks, exemplified by the analysis we undertake here.

Keywords: VPIN, PIN, High-Frequency Trading, Order Flow Toxicity, Order Imbalance, Flash Crash, VIX, Volatility Forecasting

JEL Classification: G01, G12, G14, G17, C58

Suggested Citation

Andersen, Torben G. and Bondarenko, Oleg, VPIN and the Flash Crash (May 8, 2013). Journal of Financial Markets, Vol. 17, pp. 1-46, 2014. Available at SSRN: https://ssrn.com/abstract=1881731 or http://dx.doi.org/10.2139/ssrn.1881731

Torben G. Andersen

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Oleg Bondarenko (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
(312) 996-2362 (Phone)
(312) 413-7948 (Fax)

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