Download this Paper Open PDF in Browser

Aiming at Pin: Order Flow, Information, and Liquidity

33 Pages Posted: 2 Jan 2006 Last revised: 14 May 2014

Gautam Kaul

University of Michigan, Stephen M. Ross School of Business

Qin Lei

University of Michigan at Ann Arbor

Noah Stoffman

Indiana University - Kelley School of Business - Department of Finance

Date Written: July 16, 2008

Abstract

In this study, we model and measure the existence of informed trading. Specifically, we investigate the properties of the widely used measure of informed trading, PIN, developed by Easley and O'Hara, and establish three important features of informed trading. First, the existence of informed trading, and therefore PIN, should be estimated over different trading intervals for stocks of different characteristics. Second, we establish a direct relationship between PIN and the absolute (percentage) order imbalance (AIM). The latter is not only easier to measure, but can also be readily calculated over short horizons. Most importantly, we show that conditions for the theoretical equivalence between estimated PIN and AIM of a stock serve as a guide for the optimal estimation interval that should be used for that particular stock. Finally, and significantly, an investigation around exogenous national security events reveals strong evidence against interpreting PIN and order imbalance as a liquidity measure.

Keywords: Stock Liquidity, Information Asymmetry, Information Content, Order Imbalance, PIN

JEL Classification: G12, G14

Suggested Citation

Kaul, Gautam and Lei, Qin and Stoffman, Noah, Aiming at Pin: Order Flow, Information, and Liquidity (July 16, 2008). Available at SSRN: https://ssrn.com/abstract=872945 or http://dx.doi.org/10.2139/ssrn.872945

Gautam Kaul

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-764-9594 (Phone)
734-647-6861 (Fax)

Qin Lei (Contact Author)

University of Michigan at Ann Arbor ( email )

Ross School of Business
701 Tappan Street
Ann Arbor, MI 48109-1234
United States

HOME PAGE: http://leiq.bus.umich.edu

Noah Stoffman

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
(812) 856-5664 (Phone)

HOME PAGE: http://kelley.iu.edu/nstoffma/

Paper statistics

Downloads
227
Rank
112,635
Abstract Views
1,079