twenty years of vpin - r/finance 2018past.rinfinance.com/agenda/2014/talk/stephenrush.pdftwenty...
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Introduction Methods Econometrics
Twenty Years of VPIN
Stephen Rush
Department of FinanceThe University of Connecticut School of Business
May 17, 2014
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Probability of Informed Trading (PIN)
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Probability of Informed Trading (PIN)
Lee-Reedy Algorithm (1991)
• Latency
Easley, O’Hara, and Paperman (1996)
• Original model
Easley, Hvidkjaer, and O’Hara (2002)
• Avg correlation between volume and PIN was -0.58
• Positive correlation between PIN and excess returns
• PIN matters less for large cap stocks
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Volume Synchronized PIN (VPIN)
Bulk-Volume Classification
• Quotes are irrelevant
• Robust to HF trading
Easley,Lopez de Prado, and O’Hara (2012)
• Changing information flow
• Volatility sampling
• CDF of VPIN
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Liquidity or Informed Trading?
Liquidity
• Discountnecessary to convert an asset to cash
• Likelihood of executing a trade
• Shown to be a state variable in all majorasset classes
Informed Trading
• Need to execute with few trades → greater expected valuefrom trading
• No common component on time horizons > 1 day
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
TAQ Data from 1993 through 2013
It’s not big...it’s large data.Exchanges
• NYSE
• ARCA (continued tracking after merger)
• NASDAQ
Correlations
• Volume
• Returns
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Model
“The best material model of a cat is another,or preferably the same, cat.” - Norbert Wiener
VPINi ,t = β1Market VPINi ,t + β0 + εi ,t (1)
Variables:
• MRP, SMB, and HML: Fama-French Factors
• UMD: Jegadeesh-Titman traded momentum factor
• PS: Pastor-Stambaugh traded liquidity factor
• RF: Risk-free Rate
• VPIN: Volume Synchronized Probability of Informed Trading
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Econometrics
Single Stock Regressions
• Linear model with serially correlated errors
Panel Regressions
• Fixed Effects in both security and year
• First difference estimators for timedependance
Quantile Regressions
• Check 10%, 25%, 50%, 75%, 90%
• Idiosyncratic CDF factor remains significant
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Predictive Value for Mergers and Acquisitions
Controls
• Fama-French Stock and Bond Factors
• Daily Momentum Factor
• Turnover and Spread
Methodologies
• Logit Model - significant but no foresight
• Multinomial Logit - significant but extremely low hit rate
• Event Study - not significant within a T ± 2 day event period
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Network
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Network
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Network
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
ToolsHardware AKA ’MOAR CORES!’:
• Assorted desktops running Windows 7, OS X, and Linux
• Discarded university servers (HP Proliant, IBM System X)running RStudio Server on Ubuntu Server
• Data Transfer: BitTorrent Sync (free unlimited space)
• Data Backup: Amazon Glacier - $0.01/GB per month
• Total cost: < $200
Not R Superstar:
• GAWK
Data Manipulation:
• foreach, doParallel, data.table, plyr, reshape2, fasttime, xts
Analysis:
• plm, bnlearn, nnet, quantreg
Visualization:
• ggplot2, texreg
Twenty Years of VPIN Stephen Rush
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Introduction Methods Econometrics
Questions?
Code for the VPIN calculation in R is available on my website at:http://stephenrush.wordpress.com
Email: [email protected]: @ProbablePattern
Twenty Years of VPIN Stephen Rush