The probability of informed trading measured with price impact, price reversal, and volatility

Yoshihiro Kitamura

doi:10.1016/j.intfin.2016.02.001

The probability of informed trading measured with price impact, price reversal, and volatility

Yoshihiro Kitamura^*

^*Corresponding author for this work

School of Social Sciences

Research output: Contribution to journal › Article › peer-review

4 Citations (Scopus)

Abstract

Contemporaneous and positive correlation between order flow and exchange rate is a stylized fact. I postulate that the order flow driven by informed trading has a significant price impact. I also do that little price reversal occurs in the subsequent period. The Markov-switching model provides probabilities of a significant price impact and little price reversal. I apply these probabilities to measure the probability of informed trading. The measure explains a greater share of the random walk component of price compared to other measures offered by previous studies.

Original language	English
Pages (from-to)	77-90
Number of pages	14
Journal	Journal of International Financial Markets, Institutions and Money
Volume	42
DOIs	https://doi.org/10.1016/j.intfin.2016.02.001
Publication status	Published - 2016 May 1

Keywords

Exchange rates
High-frequency data
Informed trading
Markov-switching model

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.intfin.2016.02.001

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abstract = "Contemporaneous and positive correlation between order flow and exchange rate is a stylized fact. I postulate that the order flow driven by informed trading has a significant price impact. I also do that little price reversal occurs in the subsequent period. The Markov-switching model provides probabilities of a significant price impact and little price reversal. I apply these probabilities to measure the probability of informed trading. The measure explains a greater share of the random walk component of price compared to other measures offered by previous studies.",

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author = "Yoshihiro Kitamura",

note = "Funding Information: I thank an anonymous referee for useful comments that greatly improved this paper. This work is supported by JSPS KAKENHI grant number 15K03558 . The usual disclaimer applies. Publisher Copyright: {\textcopyright} 2016 Elsevier B.V..",

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N2 - Contemporaneous and positive correlation between order flow and exchange rate is a stylized fact. I postulate that the order flow driven by informed trading has a significant price impact. I also do that little price reversal occurs in the subsequent period. The Markov-switching model provides probabilities of a significant price impact and little price reversal. I apply these probabilities to measure the probability of informed trading. The measure explains a greater share of the random walk component of price compared to other measures offered by previous studies.

AB - Contemporaneous and positive correlation between order flow and exchange rate is a stylized fact. I postulate that the order flow driven by informed trading has a significant price impact. I also do that little price reversal occurs in the subsequent period. The Markov-switching model provides probabilities of a significant price impact and little price reversal. I apply these probabilities to measure the probability of informed trading. The measure explains a greater share of the random walk component of price compared to other measures offered by previous studies.

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The probability of informed trading measured with price impact, price reversal, and volatility

Abstract

Keywords

ASJC Scopus subject areas

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