Estimating The Probability of Informed Trading: A Bayesian Approach
45 Pages Posted: 6 Jan 2019
Date Written: December 21, 2018
The Probability of Informed Trading (PIN) is a widely used indicator of information asymmetry risk in the trading of securities. Its estimation using maximum likelihood algorithms has been shown to be problematic, resulting in biased estimates, especially in the case of liquid and frequently traded assets. We provide an alternative approach to estimating PIN by means of a Bayesian method that addresses some of the shortcomings in the existing estimation strategies. The method leads to a natural quantification of the uncertainty of PIN estimates, which may prove helpful in their use and interpretation. We also provide an easy to use toolbox for estimating PIN.
Keywords: Probability of Informed Trading, PIN, software, Bayesian estimation, Information Asymmetry Risk
JEL Classification: C14, G12, G14
Suggested Citation: Suggested Citation