A PIN per day shows what news convey: the intraday probability of informed trading

A PIN per day shows what news convey: the intraday probability of informed trading This paper develops a new intraday estimation procedure for the sequential microstructure trading model initially proposed by Easley et al. (Rev Financ Stud 10:805–835, 1997a). Using a full year of intraday trading data for the top 100 German stocks, we demonstrate how the new estimation procedure eliminates or significantly reduces the shortcomings of the original approach in recent, high-frequency trading environments. We slice a trading day in buckets of several minutes’ length to obtain one estimate of the composite variable probability of informed trading (PIN) per day. This approach makes PIN applicable in short horizon event studies. Convergence rates are above 95 % even for the most liquid stocks and the model’s underlying assumptions of independence for the arrival of traders and information events are fulfilled to a much higher degree than in the original approach. An empirical application in an event study type setting demonstrates how official announcements stipulated in German insider trading legislation significantly reduce information asymmetry upon public disclosure. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

A PIN per day shows what news convey: the intraday probability of informed trading

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Publisher
Springer Journals
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-015-0535-z
Publisher site
See Article on Publisher Site

Abstract

This paper develops a new intraday estimation procedure for the sequential microstructure trading model initially proposed by Easley et al. (Rev Financ Stud 10:805–835, 1997a). Using a full year of intraday trading data for the top 100 German stocks, we demonstrate how the new estimation procedure eliminates or significantly reduces the shortcomings of the original approach in recent, high-frequency trading environments. We slice a trading day in buckets of several minutes’ length to obtain one estimate of the composite variable probability of informed trading (PIN) per day. This approach makes PIN applicable in short horizon event studies. Convergence rates are above 95 % even for the most liquid stocks and the model’s underlying assumptions of independence for the arrival of traders and information events are fulfilled to a much higher degree than in the original approach. An empirical application in an event study type setting demonstrates how official announcements stipulated in German insider trading legislation significantly reduce information asymmetry upon public disclosure.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 3, 2015

References

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