An Ex-Ante Measure of the Probability of Informed Trading

45 Pages Posted: 21 Mar 2006 Last revised: 19 Dec 2008

See all articles by Marius Popescu

Marius Popescu

University of Massachusetts Boston - Department of Accounting and Finance

Raman Kumar

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: December 16, 2008

Abstract

The paper develops a new measure for the probability of informed trading, which can be estimated from the observed quotes and depths. This measure (PROBINF) represents the specialist's ex-ante estimate of the probability of informed trading. We find that PROBINF exhibits a strong and robust relationship with the observed level of insider trading and with measures of the price impact of trades. Moreover, the time series pattern of our measure in an intra-day analysis around earnings announcements is consistent with previous findings and with expectations regarding informed trading. An important advantage of PROBINF is that it can be estimated for each quote, and thus can be used to measure short term (e.g. intra-day, daily etc.) changes in informed trading and information asymmetry around events such as merger and acquisition announcements, share repurchases, stock splits, dividend announcements and index additions and deletions.

Keywords: Informed trading, information asymmetry

JEL Classification: G14

Suggested Citation

Popescu, Marius and Kumar, Raman, An Ex-Ante Measure of the Probability of Informed Trading (December 16, 2008). Available at SSRN: https://ssrn.com/abstract=891717 or http://dx.doi.org/10.2139/ssrn.891717

Marius Popescu (Contact Author)

University of Massachusetts Boston - Department of Accounting and Finance ( email )

McCormack Hall
Boston, MA 02125
United States
617-287-7756 (Phone)

Raman Kumar

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

Dept. of Finance, Pamplin 2126
Blacksburg, VA 24061
United States
540-231-5700 (Phone)
540-231-3155 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
692
Abstract Views
2,751
rank
51,814
PlumX Metrics