Evaluating VPIN as a Trigger for Single-Stock Circuit Breakers

49 Pages Posted: 24 Mar 2015 Last revised: 14 Aug 2017

See all articles by David Abad

David Abad

Universidad de Alicante

Magdalena Massot

Universidad de las Islas Baleares

Roberto Pascual

Universidad de las Islas Baleares

Date Written: August 14, 2017

Abstract

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

Abad, David and Massot, Magdalena and Pascual Gascó, Roberto, Evaluating VPIN as a Trigger for Single-Stock Circuit Breakers (August 14, 2017). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2584346 or http://dx.doi.org/10.2139/ssrn.2584346

David Abad

Universidad de Alicante ( email )

Campus de San Vicente
Carretera San Vicente del Raspeig
San Vicente del Raspeig, 03690
Spain

Magdalena Massot

Universidad de las Islas Baleares ( email )

Crtra. Valldemossa, km 7.5
Ed. Jovellanos
Palma de Mallorca, Illles Balears 07122
Spain
34 971 172513 (Phone)
34 971 172389 (Fax)

Roberto Pascual Gascó (Contact Author)

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

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