The Probability of Informed Trading and the Performance of Stock in an Order-Driven Market

24 Pages Posted: 19 Oct 2001

See all articles by Tai Ma

Tai Ma

National Sun Yat-sen University

M.H. Hsieh

National Sun Yat-sen University

J.H. Chen

National Sun Yat-sen University

Date Written: January 2001

Abstract

In this paper we estimate the probability of informed trading (Pi) in an order-driven stock market as well as perform a comprehensive analysis on the interrelations among probability of informed trading and three common performance indicators, i.e., liquidity, volatility and efficiency. We find that uninformed traders exhibit price chasing behavior even over very short time interval and that volatility in stock price attracts uninformed traders. Using 3SLS which takes into consideration the endogeneity of the probability of informed trading and the liquidity, volatility and efficiency measures, our empirical results provide new evidence on market microstructure literature. We find that Pi and the volatility and liquidity of stocks are simultaneously determined. Higher Pi leads to lower liquidity and higher volatility, and vice versa. Liquidity can explain volatility and efficiency, while the opposite is not true. Firms with larger size, higher ownership concentration and lower turnover have higher probability of informed trading.

Keywords: probability of informed trading, liquidity, efficiency, volatility

Suggested Citation

Ma, Tai and Hsieh, Minghua and Chen, J.H., The Probability of Informed Trading and the Performance of Stock in an Order-Driven Market (January 2001). Available at SSRN: https://ssrn.com/abstract=264765 or http://dx.doi.org/10.2139/ssrn.264765

Tai Ma (Contact Author)

National Sun Yat-sen University ( email )

70 Lien-hai Rd.
Kaohsiung, 80743
Taiwan
886-7-525-2000 ext. 4810 (Phone)
886-7-525-4899 (Fax)

HOME PAGE: http://www.finance.nsysu.edu.tw/teachers/matai/e-index.htm

Minghua Hsieh

National Sun Yat-sen University

70 Lien-hai Rd.
Kaohsiung, 80743
Taiwan

J.H. Chen

National Sun Yat-sen University

70 Lien-hai Rd.
Kaohsiung, 80743
Taiwan

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