Maksim ChupriyanovPublished in:
Global Markets and Financial Engineering (Russian version)
– Volume 3, Number 2 (April-June, 2016)

JEL classification: D82, G12, G14

Keywords: high-frequency exchange trading, information asymmetry, liquidity, toxicity, volatility, VPIN


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Abstract:

In microstructure of financial markets there are two consecutive trade models based on the claim flow imbalance that are used for measuring the informational asymmetry. This research contains the analysis of an indicator of the claim flow toxicity. This indicator has been adjusted for the conditions of VPIN high-frequency trading and is based on the model for determining the probability of informed trading (PIN) that was developed by Easley, Kiefer, O'Hara, and Paperman (1996). This work gives the answer to the following question: is VPIN (Volume-Synchronized Probability of Informed Trading) metrics an appropriate proxy for finding the information asymmetry. In the course of the research the author has tested the forecast capability of VPIN indicator, index unbiasedness based on correlation with trade intensity, volatility of the volumes and volatility index VIX, causal dependence of the indicator on the main (CME) and additional (BM&FBOVESPA) trading platform. The results have demonstrated that VPIN has negative correlation with trade intensity and positive correlation with volatility index VIX, daily volume and inhomogeneity of volumes. VPIN indicator has weak forecast power for finding the future short-term volatility. Information asymmetry cannot be generated on the additional stock-exchange by itself; its appearance is a consequence of the information asymmetry on the main stock-exchange; therefore, VPIN reflects not the information asymmetry, but the volatility of volumes.

Highlights:

► the information asymmetry is not markedly observed, its presence becomes evident only from the data of market trading
► the first indicator (PIN) describing the information asymmetry was introduced in 1996
► in the conditions of high-frequency trading VPIN is the main indicator of claim flow toxicity
► there are two opposite viewpoints among scholars; one of them postulates that VPIN is a useful and unbiased measuring instrument of the information asymmetry, while the other one asserts that this is just another measure of volatility
► VPIN indicator has a negative correlation with trade intensity and positive correlation with volatility of volumes in time bars
► VPIN indicator has weak forecast power in relation to the future short-term volatility
► VPIN indicator has a positive correlation with the volatility index VIX and daily volume
► on the additional (nonbasic) stock-exchange the appearance of the information asymmetry is a result of information asymmetry on the main instrument trade platform
► the appraisals of VPIN indicator on the additional platform are high and, given that the actors of this platform are likely only to copy the acts on the main platform and there can be no independent information asymmetry, the validity of this indicator raises concerns

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