TY - JOUR

T1 - Improvements in estimating the probability of informed trading models

AU - Cheng, Tsung Chi

AU - Lai, Hung Neng

N1 - Publisher Copyright:
© 2020 Informa UK Limited, trading as Taylor & Francis Group.

PY - 2021

Y1 - 2021

N2 - Two advances have been made in the estimation of probability of informed trading (PIN) models. First, an initial-value-setting scheme has been proposed, that sets up a grid for initial values of mixture probabilities and uses the probabilities to divide the sample so as to derive the initial values of Poisson parameters. Second, the mixture bivariate normal distribution can help approximate the compound Poisson distribution in estimating PIN models. This study implements two approaches to simulated and real data for the PIN and Adjusted PIN models and compares their performance with the literature. The new initial-value-setting scheme performs better than those of Yan and Zhang [An improved estimation method and empirical properties of the probability of informed trading. J. Banking Finance, 2012, 36(2), 454–467] and Ersan and Alıcı [An unbiased computation methodology for estimating the probability of informed trading (PIN). J. Int. Financ. Markets, Inst. Money, 2016, 43, 74–94], and using the normal distribution outperforms the Poisson distribution under certain variance specifications.

AB - Two advances have been made in the estimation of probability of informed trading (PIN) models. First, an initial-value-setting scheme has been proposed, that sets up a grid for initial values of mixture probabilities and uses the probabilities to divide the sample so as to derive the initial values of Poisson parameters. Second, the mixture bivariate normal distribution can help approximate the compound Poisson distribution in estimating PIN models. This study implements two approaches to simulated and real data for the PIN and Adjusted PIN models and compares their performance with the literature. The new initial-value-setting scheme performs better than those of Yan and Zhang [An improved estimation method and empirical properties of the probability of informed trading. J. Banking Finance, 2012, 36(2), 454–467] and Ersan and Alıcı [An unbiased computation methodology for estimating the probability of informed trading (PIN). J. Int. Financ. Markets, Inst. Money, 2016, 43, 74–94], and using the normal distribution outperforms the Poisson distribution under certain variance specifications.

KW - Market microstructure

KW - Maximum likelihood method

KW - Mixture distribution

KW - Probability of informed trading

UR - http://www.scopus.com/inward/record.url?scp=85090299130&partnerID=8YFLogxK

U2 - 10.1080/14697688.2020.1800805

DO - 10.1080/14697688.2020.1800805

M3 - 期刊論文

AN - SCOPUS:85090299130

SN - 1469-7688

VL - 21

SP - 771

EP - 796

JO - Quantitative Finance

JF - Quantitative Finance

IS - 5

ER -