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An Agent-Based Investigation of the Probability of Informed Trading

  • Olivier BrandouyEmail author
  • Philippe Mathieu
Chapter
Part of the Lecture Notes in Economics and Mathematical Systems book series (LNE, volume 669)

Abstract

We study the Volume Synchronized Probability of Informed Trading (VPIN) proposed by Easley D, López de Prado M, O’Hara (Rev Financ Stud 25:1457–1493, 2010) as a consistent measure of the “order flow toxicity”. The VPIN is a proxy for the probability that informed traders adversely select uninformed ones, notably Market Makers. We use a price-driven, asynchronous, agent-based artificial market where populations of agents evolve according to the general logic and within a similar framework as proposed by Easley D, Kiefer D, O’Hara M, Paperman J (J Financ 51(4):1405–1436, 1996). Among others, we document situations in which the VPIN is at high levels even if no informed trading is at play. This ambiguity in the consistency of the VPIN suggests that this measure may mislead competitive market makers in their decisions about the spread.

Keywords

Reservation Price Market Maker Order Book Informed Trader Artificial Market 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

References

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Copyright information

© Springer International Publishing Switzerland 2014

Authors and Affiliations

  1. 1.Sorbonne Graduate Business SchoolParisFrance
  2. 2.LIFL, UMR CNRS-USTL 8022Université Lille 1LilleFrance

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