VPIN and the flash crash

Torben G. Andersen*, Oleg Bondarenko

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

36 Scopus citations

Abstract

The Volume-Synchronized Probability of Informed trading (VPIN) metric is introduced by Easley, López de Prado, and O'Hara (2011a) as a real-time indicator of order flow toxicity. They find the measure useful in monitoring order flow imbalances and conclude it may help signal impending market turmoil, exemplified by historical high readings of the metric prior to the flash crash. More generally, they show that VPIN is significantly correlated with future short-term return volatility. In contrast, our empirical investigation of VPIN documents that it is a poor predictor of short run volatility, that it did not reach an all-time high prior, but rather after, the flash crash, and that its predictive content is due primarily to a mechanical relation with the underlying trading intensity. We also investigate a later incarnation of VPIN, stemming from Easley, López de Prado, and O'Hara (2012a), and reach similar conclusions. In general, we stress that adoption of any specific metric for order flow toxicity should be contingent on satisfactory performance relative to suitable benchmarks, exemplified by the analysis we undertake here.

Original languageEnglish (US)
Pages (from-to)1-46
Number of pages46
JournalJournal of Financial Markets
Volume17
Issue number1
DOIs
StatePublished - Jan 2014

Keywords

  • Flash crash
  • High-frequency trading
  • Order flow toxicity
  • Order imbalance
  • PIN
  • VIX
  • VPIN
  • Volatility forecasting

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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