Department of Economics and Business Economics

VPIN and the flash crash

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

Standard

VPIN and the flash crash. / Andersen, Torben G.; Bondarenko, Oleg.

In: Journal of Financial Markets, Vol. 17, No. 1, 01.01.2014, p. 1-46.

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

Harvard

Andersen, TG & Bondarenko, O 2014, 'VPIN and the flash crash', Journal of Financial Markets, vol. 17, no. 1, pp. 1-46. https://doi.org/10.1016/j.finmar.2013.05.005

APA

Andersen, T. G., & Bondarenko, O. (2014). VPIN and the flash crash. Journal of Financial Markets, 17(1), 1-46. https://doi.org/10.1016/j.finmar.2013.05.005

CBE

Andersen TG, Bondarenko O. 2014. VPIN and the flash crash. Journal of Financial Markets. 17(1):1-46. https://doi.org/10.1016/j.finmar.2013.05.005

MLA

Andersen, Torben G. and Oleg Bondarenko. "VPIN and the flash crash". Journal of Financial Markets. 2014, 17(1). 1-46. https://doi.org/10.1016/j.finmar.2013.05.005

Vancouver

Andersen TG, Bondarenko O. VPIN and the flash crash. Journal of Financial Markets. 2014 Jan 1;17(1):1-46. https://doi.org/10.1016/j.finmar.2013.05.005

Author

Andersen, Torben G. ; Bondarenko, Oleg. / VPIN and the flash crash. In: Journal of Financial Markets. 2014 ; Vol. 17, No. 1. pp. 1-46.

Bibtex

@article{40d2db0812ae4ef8910979de77db51fe,
title = "VPIN and the flash crash",
abstract = "The Volume-Synchronized Probability of Informed trading (VPIN) metric is introduced by Easley, L{\'o}pez 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, L{\'o}pez 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.",
keywords = "Flash crash, High-frequency trading, Order flow toxicity, Order imbalance, PIN, VIX, Volatility forecasting, VPIN",
author = "Andersen, {Torben G.} and Oleg Bondarenko",
year = "2014",
month = jan,
day = "1",
doi = "10.1016/j.finmar.2013.05.005",
language = "English",
volume = "17",
pages = "1--46",
journal = "Journal of Financial Markets",
issn = "1386-4181",
publisher = "Elsevier BV",
number = "1",

}

RIS

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 -