Identifying and Pricing Adverse Selection Risk with VPIN

36 Pages Posted: 29 Apr 2015 Last revised: 20 Jan 2020

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Stephen Rush

Bowling Green State University - Department of Finance; Vietnam National University - Ho Chi Minh City (VNU-HCM) - University of Economics and Law

Date Written: February 1, 2016

Abstract

We perform the first large-sample estimation of the Volume Synchronized Probability of Informed Trading (VPIN) measure, validating it and performing pricing tests of informed trading. The pricing of VPIN is not explained by firm characteristics. A portfolio long (short) high-VPIN (low-VPIN) stocks delivers a monthly five-factor alpha of .18%, which rises to .29% when using a signed version of the measure (SVPIN). A long-short trade on SVPIN delivers an annualized five-factor BHAR of 11.45%. Incorporating a reversal in stock performance in portfolio sorts on SVPIN improves BHARs to 17.34%.

Keywords: Asset Pricing, VPIN, Adverse Selection, Informed Trading, Market Microstructure

JEL Classification: G12, G14, C55, D56

Suggested Citation

Borochin, Paul and Rush, Stephen, Identifying and Pricing Adverse Selection Risk with VPIN (February 1, 2016). Available at SSRN: https://ssrn.com/abstract=2599871 or http://dx.doi.org/10.2139/ssrn.2599871

Paul Borochin

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Stephen Rush (Contact Author)

Bowling Green State University - Department of Finance ( email )

212 Business Administration
Bowling Green, OH 43403
United States

HOME PAGE: http://bgsu.edu

Vietnam National University - Ho Chi Minh City (VNU-HCM) - University of Economics and Law ( email )

Vietnam National University - Ho Chi Minh City
Linh Xuan Ward, Thu Duc
Ho Chi Minh City
Vietnam

HOME PAGE: http://uel.edu.vn

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