The Probability of Informed Trading and Asset Pricing with New Estimation Strategy

Project Details

Description

This project will extend my MOST research project in the last year. In that project, I relax the assumption commonly used in the traditional probability of informed trading type of models, namely, the probability of bad news occurring is constant. Instead, I inferred the bad-news probability from historical returns and use the time-varying probability to estimate the models of the probability of informed trading and the adjusted probability of informed trading. This project will use the traditional and the new methods to estimate the probability of informed trading by Easley et al. (2002), the adjusted probability of informed trading and the probability of symmetric order-flow shock by Duarte and Young (2009), and the probability of informed trading based on the good news and the bad news by Brennan et al. (2016), in order to compare their performance in serving as characteristics to explain the U.S. stock returns. Furthermore, the estimated probabilities will be used to construct pricing factors to examine their performance to reduce excess returns from Carhart’s (1997) four factor model and Fama and French’s (2015) five factor model.
StatusFinished
Effective start/end date1/08/1731/10/18

UN Sustainable Development Goals

In 2015, UN member states agreed to 17 global Sustainable Development Goals (SDGs) to end poverty, protect the planet and ensure prosperity for all. This project contributes towards the following SDG(s):

  • SDG 13 - Climate Action
  • SDG 17 - Partnerships for the Goals

Keywords

  • Probabilityof InformedTrading
  • InformationAsymmetry
  • As-set Pricing
  • Liquidity

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