An Improved Estimation Method and Empirical Properties of the Probability of Informed Trading

45 Pages Posted: 14 Mar 2006 Last revised: 8 Aug 2011

See all articles by Yuxing Yan

Yuxing Yan

Canisius College

Shaojun Zhang

Hong Kong Polytechnic University

Multiple version iconThere are 2 versions of this paper

Date Written: March 9, 2010

Abstract

We propose a method to overcome a bias in the estimate of the probability of informed trading (PIN). This bias arises when the numerical maximization procedure generates corner solutions. We analyze the PIN estimates for about 80,000 stock-quarter pairs between 1993 and 2004, and observe a decreasing trend in PIN over this time period. The decimalization in January 2001 appears to accelerate this trend; the quarterly median PIN across stocks decreased by 20% since the first quarter of 2001 until the end of 2004. This provides direct evidence that the risk of trading against informed traders has reduced in recent years. We also find that the risk of informed trading is lower in the first quarter of a year than in the previous fourth quarter, especially for stocks whose price has gone up in previous year.

Keywords: decimalization, informed trading, market microstructure, PIN, tax-loss selling

JEL Classification: C13, C61, G12, G14

Suggested Citation

Yan, Yuxing and Zhang, Shaojun, An Improved Estimation Method and Empirical Properties of the Probability of Informed Trading (March 9, 2010). Available at SSRN: https://ssrn.com/abstract=890486 or http://dx.doi.org/10.2139/ssrn.890486

Yuxing Yan

Canisius College ( email )

Buffalo, NY 14208
United States
7168882604 (Phone)

Shaojun Zhang (Contact Author)

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

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