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
Date Written: August 14, 2012
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
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