VPIN as a Measure of Information, Liquidity, and Volatility of Exchange Price Dynamics

Abstract Sequential trading models in the microstructure of financial markets are used to measure information asymmetry basing on order flow imbalance. As an update of the well-known PIN measure, Easley et al. (2012a) have developed a new measure of order flow toxicity called Volume-Synchronized Probability of Informed Trading or VPIN. The present paper provides a detailed description of the VPIN estimation procedure and its properties paying special attention to the main innovations introduced and the key variables of this novel tool. Thereby this paper answers the question is VPIN metric an appropriate proxy for calculation information trading or not. In the course of the study the main objectives to meet must be those of: 1. Replicating the VPIN’s methodology for calculation inside trading; 2. Testing an unbiasedness of VPIN estimates based on the correlation with the trade intensity, volatility and volume volatility index VIX; 3. Testing the predictive power of VPIN; 4. Testing the causal relationship of information asymmetry on main indicator (CME) and slave (BM & FBOVESPA) trading platform. As a result, we have VPIN negatively correlated with trade intensity, positively with VIX, daily volume and heterogeneity of volumes. VPIN has a poor predictive power to predict future short-term volatility. Dependent (slave) exchange cannot independently generate information asymmetry, its origin - is a consequence of information asymmetry on the main floor. Keywords: VPIN, asymmetry of information, toxicity, high-frequency trading, liquidity, volatility.