Estimating The Probability of Informed Trading: A Bayesian Approach

45 Pages Posted: 6 Jan 2019

See all articles by Jim E. Griffin

Jim E. Griffin

University of Kent; University of Kent - School of Mathematics, Statistics and Actuarial Science

Jaideep S. Oberoi

Kent Business School

Samuel Oduro

University of Kent

Date Written: December 21, 2018

Abstract

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

Griffin, Jim E. and Oberoi, Jaideep S. and Oduro, Samuel, Estimating The Probability of Informed Trading: A Bayesian Approach (December 21, 2018). Available at SSRN: https://ssrn.com/abstract=3305086 or http://dx.doi.org/10.2139/ssrn.3305086

Jim E. Griffin

University of Kent ( email )

Cornwallis Building
Canterbury, Kent CT2 7NF
United Kingdom

HOME PAGE: http://www.kent.ac.uk/ims/personal/jeg28/index.htm

University of Kent - School of Mathematics, Statistics and Actuarial Science ( email )

Cornwallis Building
Canterbury, CT2 7NF
United Kingdom

Jaideep S. Oberoi (Contact Author)

Kent Business School ( email )

University of Kent
Sibson Building, Parkwood Road
Canterbury, Kent CT2 7FS
United Kingdom

Samuel Oduro

University of Kent ( email )

Keynes College
Canterbury, Kent CT2 7NP
United Kingdom

HOME PAGE: http://www.kent.ac.uk/casri/our-people/profiles/oduro_samuel.html

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