Measuring the Probability of Informed Trading in an Order-Driven Auction Market and a Comprehensive Analysis on the Determinants of Informed Trading

36 Pages Posted: 12 May 2004

See all articles by Tai Ma

Tai Ma

National Sun Yat-sen University

Josephine Yang

National Sun Yat-sen University

Abstract

In this study, we are able to estimate the probability of informed trading on a transactional basis, which makes the hitherto difficult task of examining the transactional dynamics between informed trading, market depth and spread feasible. In addition, we have integrated the determinants of informed trading by a comprehensive analysis.

We find that, as informed traders arrive, current volume and spread increase. This supports the clustering of trading hypothesis and provides empirical evidence to Admati and Pfleiderer (1988) viewpoint that both volatility and volume increase with informed trading. The VAR result suggests that uninformed traders avoid trading with the informed, and the decision of the uninformed depends on previous condition. The decision of the informed is based more on current situation and is attracted by price volatility.

Overall, it is clear that the ultimate determinants of informed trading lies with the firm's financial quality and ownership structure. The condition of the market influences the timing of the informed trading, rather than the level of informed trading between firms.

Keywords: Probability of informed trading, market depth, spread, call market, insiders competition, information reservation

Suggested Citation

Ma, Tai and Yang, Josephine, Measuring the Probability of Informed Trading in an Order-Driven Auction Market and a Comprehensive Analysis on the Determinants of Informed Trading. Available at SSRN: https://ssrn.com/abstract=498586 or http://dx.doi.org/10.2139/ssrn.498586

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

Josephine Yang

National Sun Yat-sen University

70 Lien-hai Rd.
Kaohsiung 80424, 80743
Taiwan

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