Pinning down an effective measure for probability of informed trading

James Petchey, Marvin Wee, Joey Yang

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

This paper investigates whether measures of the probability of information-based trading (PIN) estimated from microstructure models capture the effects of information asymmetry and trading by informed traders. To address the issue of the joint hypothesis, we examine the effectiveness of these measures using a sample of merger and acquisition (M&A) announcements that are known to be associated with illegal insider trading. We find that the PIN measure decreases prior to the announcements, while a modified measure that allows for the autoregressive conditional duration (ACD) of trades and the time-varying probabilities of news better reflects the presence of informed trading. Our results also suggest that the modified specification (PIN-AACD) overcomes some of the estimation problems found in the PIN measure in prior research. © 2016
Original languageEnglish
Pages (from-to)456-475
Number of pages20
JournalPacific-Basin Finance Journal
Volume40
Issue numberPart B
DOIs
Publication statusPublished - 2016

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