Estimation of Time Varying Adjusted Probability of Informed Trading and Probability of Symmetric Order-Flow Shock

Journal of Applied Econometrics, Vol. 28, 2013

18 Pages Posted: 14 Aug 2012 Last revised: 11 Aug 2015

See all articles by Daniel P. A. Preve

Daniel P. A. Preve

Singapore Management University

Yiu Kuen Tse

Singapore Management University - School of Social Sciences

Date Written: August 14, 2012

Abstract

Recently Duarte and Young (2009) study the probability of informed trading (PIN) proposed by Easley et al. (2002) and decompose it into two parts: the adjusted PIN (APIN) as a measure of asymmetric information and the probability of symmetric order-flow shock (PSOS) as a measure of illiquidity. They provide some cross-section estimates of these measures using daily data over annual periods. In this paper we propose a method to estimate daily APIN and PSOS by extending the method in Tay et al. (2009) using high-frequency transaction data. Our empirical results show that while PIN is positively contemporaneously correlated with variance, APIN is not. On the other hand, PSOS is positively correlated with daily average effective spread and variance, which is consistent with the interpretation of PSOS as a measure of illiquidity. Compared to APIN, PSOS exhibits clustering and sporadic bursts over time.

Keywords: autoregressive conditional duration, market microstructure, probability of informed trading, probability of symmetric order-flow shock, transaction data

Suggested Citation

Preve, Daniel P. A. and Tse, Yiu Kuen, Estimation of Time Varying Adjusted Probability of Informed Trading and Probability of Symmetric Order-Flow Shock (August 14, 2012). Journal of Applied Econometrics, Vol. 28, 2013. Available at SSRN: https://ssrn.com/abstract=2129088

Daniel P. A. Preve

Singapore Management University ( email )

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Singapore, 178903
Singapore

Yiu Kuen Tse (Contact Author)

Singapore Management University - School of Social Sciences ( email )

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Federal Building #02-05
Singapore, 259756
Singapore
+65 822-0257 (Phone)
+65 822-8081 (Fax)

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