Can VPIN Forecast Geopolitical Events? Evidence from the 2014 Crimean Crisis

Abstract

We study the recent Crimean Crisis and the sequence of outcomes that led to the intervention by the Russian Army, which directly affected equity prices in Russia, to investigate how informed traders may have used their advantage to trade prior to the moment markets fell. We compute the Volume-synchronized Probability of Informed Trading (VPIN) for the Russian RTS equity index and for individual stocks, documenting that levels of informed trading increased considerably between one and three trading days before market prices reflected the invasion. We also investigate the predictive power of the cumulative distribution of VPIN on future stock prices, showing a statistically significant (negative) relation during the period of elevated tensions between Russia and Ukraine. Last, we investigate the levels of VPIN measured for global depositary receipts (GDRs) of Russian firms, documenting a similar increasing pattern prior to the invasion date but generally subsequent to the spikes obtained from the corresponding securities locally traded in Russia. Overall, our results provide additional support for the use of VPIN as a tool for monitoring the likelihood of undesirable geopolitical events.

Keywords: Inside Trading, Market Microstructure, VPIN, Crimean Crisis

JEL Classification: G12 G14, G15