Estimating the Probability of Informed Trading

Posted: 6 Sep 2001

See all articles by Ken Nyholm

Ken Nyholm

European Central Bank (ECB)

Abstract

Using a new empirical model, I estimate the probability of trades being generated by privately informed traders. Inference is drawn on a trade-by-trade basis using data samples from the New York Stock Exchange (NYSE). The modeling setup facilitates in-depth analysis of the estimated probability of informed trading at the intraday level and for stocks with different levels of trading activity. The most important empirical results are: (a) the intradaily pattern of the inferred probability of informed trading is highly correlated with the intradaily pattern of observed quoted spreads, (b) differences in the magnitude of quoted spreads across volume categories are not exclusively related to differences in the level of informed trading, and (c) private information is incorporated faster in the quotes for high-volume stocks than in the quotes for low-volume stocks.

JEL Classification: C21, C52, D82

Suggested Citation

Nyholm, Ken, Estimating the Probability of Informed Trading. Forthcoming in Journal of Financial Research. Available at SSRN: https://ssrn.com/abstract=277329

Ken Nyholm (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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