Department of Economics and Business Economics

Reflecting on the VPIN Dispute

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  • rp13_42

    Submitted manuscript, 306 KB, PDF document

  • Torben G. Andersen, Northwestern University, United States
  • Oleg Bondarenko, University of Illinois at Chicago, United States
In Andersen and Bondarenko (2014), using tick data for S&P 500 futures, we establish that the VPIN metric of Easley, Lopez de Prado, and O'Hara (ELO), by construction, will be correlated with trading volume and return volatility (innovations). Whether VPIN is more strongly correlated with volume or volatility depends on the exact implementation. Hence, it is crucial for the interpretation of VPIN as a harbinger of market turbulence or as a predictor of short-term volatility to control for current volume and volatility. Doing so, we find no evidence of incremental predictive power of VPIN for future volatility. Likewise, VPIN does not attain unusual extremes prior to the flash crash. Moreover, the properties of VPIN are strongly dependent on the underlying trade classification. In particular, using
more standard classification techniques, VPIN behaves in the exact opposite manner of what is portrayed in ELO (2011a, 2012a). At a minimum, ELO should rationalize this systematic reversal as the classification becomes more closely aligned with individual transactions.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages12
Publication statusPublished - 19 Dec 2013
SeriesCREATES Research Papers
Number2013-42

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