Decomposing the Probability of Informed Trading Measure

Posted: 28 Aug 2012 Last revised: 2 Oct 2018

See all articles by Wang Chun Wei

Wang Chun Wei

University of Queensland - Faculty of Business, Economics and Law; University of Queensland - Finance

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Dionigi Gerace

The University of Sydney

Date Written: May 27, 2012

Abstract

This paper aims to analyze the dynamics of information asymmetry in market microstructure through the Easley et al. (2002)'s PIN framework in two segments. Firstly, we test to see if factors such as size, value and illiquidity can be used to explain PIN. Secondly, we extend beyond the traditional literature by examining individual components of PIN, especially the informed and uninformed trade intensities. We contribute to the literature by documenting non-linear relationships between trade intensities, and their autocorrelation functions. Our study show that uninformed intensity is more persistent than informed trading and that there exists statistically significant spillover effects from informed trading into liquidity trades, suggesting that liquidity trades lag behind that of informed trades.

Keywords: PIN, informed trading, information asymmetry, market microstructure

JEL Classification: C01, C02, G10, G14, G17

Suggested Citation

Wei, Wang Chun and Frino, Alex and Gerace, Dionigi, Decomposing the Probability of Informed Trading Measure (May 27, 2012). Available at SSRN: https://ssrn.com/abstract=2137398 or http://dx.doi.org/10.2139/ssrn.2137398

Wang Chun Wei (Contact Author)

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

University of Queensland - Finance ( email )

Australia

Alex Frino

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Dionigi Gerace

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

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