Department of Economics and Business Economics

Torben Gustav Andersen

VPIN and the flash crash

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

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.

Original languageEnglish
JournalJournal of Financial Markets
Volume17
Issue1
Pages (from-to)1-46
Number of pages46
ISSN1386-4181
DOIs
Publication statusPublished - 1 Jan 2014

    Research areas

  • Flash crash, High-frequency trading, Order flow toxicity, Order imbalance, PIN, VIX, Volatility forecasting, VPIN

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