TY - JOUR

T1 - VPIN and the flash crash

AU - Andersen, Torben G.

AU - Bondarenko, Oleg

PY - 2014/1/1

Y1 - 2014/1/1

N2 - The Volume-Synchronized Probability of Informed trading (VPIN) metric is introduced by Easley, López de Prado, and O'Hara (2011a) as a real-time indicator of order flow toxicity. They find the measure useful in monitoring order flow imbalances and conclude it may help signal impending market turmoil, exemplified by historical high readings of the metric prior to the flash crash. More generally, they show that VPIN is significantly correlated with future short-term return volatility. In contrast, our empirical investigation of VPIN documents that it is a poor predictor of short run volatility, that it did not reach an all-time high prior, but rather after, the flash crash, and that its predictive content is due primarily to a mechanical relation with the underlying trading intensity. We also investigate a later incarnation of VPIN, stemming from Easley, López de Prado, and O'Hara (2012a), and reach similar conclusions. In general, we stress that adoption of any specific metric for order flow toxicity should be contingent on satisfactory performance relative to suitable benchmarks, exemplified by the analysis we undertake here.

AB - The Volume-Synchronized Probability of Informed trading (VPIN) metric is introduced by Easley, López de Prado, and O'Hara (2011a) as a real-time indicator of order flow toxicity. They find the measure useful in monitoring order flow imbalances and conclude it may help signal impending market turmoil, exemplified by historical high readings of the metric prior to the flash crash. More generally, they show that VPIN is significantly correlated with future short-term return volatility. In contrast, our empirical investigation of VPIN documents that it is a poor predictor of short run volatility, that it did not reach an all-time high prior, but rather after, the flash crash, and that its predictive content is due primarily to a mechanical relation with the underlying trading intensity. We also investigate a later incarnation of VPIN, stemming from Easley, López de Prado, and O'Hara (2012a), and reach similar conclusions. In general, we stress that adoption of any specific metric for order flow toxicity should be contingent on satisfactory performance relative to suitable benchmarks, exemplified by the analysis we undertake here.

KW - Flash crash

KW - High-frequency trading

KW - Order flow toxicity

KW - Order imbalance

KW - PIN

KW - VIX

KW - Volatility forecasting

KW - VPIN

U2 - 10.1016/j.finmar.2013.05.005

DO - 10.1016/j.finmar.2013.05.005

M3 - Journal article

AN - SCOPUS:84891824916

VL - 17

SP - 1

EP - 46

JO - Journal of Financial Markets

JF - Journal of Financial Markets

SN - 1386-4181

IS - 1

ER -