From PIN to VPINAn introduction to order flow toxicity

  1. Abad Díaz, David
  2. Yagüe Guirao, José
Revista:
The Spanish Review of Financial Economics

ISSN: 2173-1268

Any de publicació: 2012

Volum: 10

Número: 2

Pàgines: 74-83

Tipus: Article

DOI: 10.1016/J.SRFE.2012.10.002 DIALNET GOOGLE SCHOLAR lock_openAccés obert editor

Altres publicacions en: The Spanish Review of Financial Economics

Resum

As an update of the well-known PIN measure, () have developed a new measure of order flow toxicity called Volume-Synchronized Probability of Informed Trading or VPIN. Order flow toxicity makes reference to adverse selection risk but applied to the world of high frequency trading (HFT). We provide a detailed description of the VPIN estimation procedure paying special attention to the main innovations introduced and the key variables of this novel tool. By using a sample of stocks listed on the Spanish market, we compare VPIN to PIN. Although VPIN metric is conceived for the HFT environment, our results suggest that certain VPIN specifications provide proxies for adverse selection risk similar to those obtained by the PIN model. Thus, we consider that the key variable in the VPIN procedure is the number of buckets used and that VPIN can be a helpful device which is not exclusively applicable to the HFT world.

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