Identifying and Pricing Adverse Selection Risk with VPIN
36 Pages Posted: 29 Apr 2015 Last revised: 20 Jan 2020
Date Written: February 1, 2016
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: Suggested Citation