Estimation of time-varying adjusted probability of informed trading and probability of symmetric order-flow shock

• Main Authors: PREVE, Daniel, TSE, Yiu Kuen
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2013
• Subjects: autoregressive conditional duration; market microstructure; probability of informed trading; probability of symmetric order-flow shock; transaction data; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1398; https://ink.library.smu.edu.sg/context/soe_research/article/2397/viewcontent/PR_JAE_R3.pdf
• Institution: Singapore Management University

Recently Duarte and Young (2009) study the probability of informed trading (PIN) proposed by Easley et al. (2002) and decompose it into two parts: the adjusted PIN (APIN) as a measure of asymmetric information and the probability of symmetric order-flow shock (PSOS) as a measure of illiquidity. They provide some cross-section estimates of these measures using daily data over annual periods. In this paper we propose a method to estimate daily APIN and PSOS by extending the method in Tay et al. (2009) using high-frequency transaction data. Our empirical results show that while PIN is positively contemporaneously correlated with variance, APIN is not. On the other hand, PSOS is positively correlated with daily average e ective spread and variance, which is consistent with the interpretation of PSOS as a measure of illiquidity. Compared to APIN, PSOS exhibits clustering and sporadic bursts over time.