Evaluating VPIN as a Trigger for Single-Stock Circuit Breakers
49 Pages Posted: 24 Mar 2015 Last revised: 14 Aug 2017
Date Written: August 14, 2017
We study if VPIN (Easley, López de Prado, and O’Hara, 2012, Review of Financial Studies 25, 1457-1493) is an efficient advance indicator of toxicity-induced liquidity crises and related sharp price movements. We find that high VPIN readings rarely signal abnormal illiquidity, and very occasionally anticipate large intraday price changes leading to actual trading halts. We find significant differences in illiquidity and price impact between VPIN-identified toxic and non-toxic halts, but they tend to vanish when we control for ex ante realized volatility. We conclude that the capacity of VPIN to anticipate truly toxic events is limited.
Keywords: VPIN, circuit breakers, trading halts, price limits, order-flow toxicity
JEL Classification: G01
Suggested Citation: Suggested Citation