Flow toxicity and liquidity in a high-frequency world

Easley, D; López De Prado, MM; O'Hara, M

Flow toxicity and liquidity in a high-frequency world

Easley, D López De Prado, MM O'Hara, M

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Publication Type:: Journal Article
Citation:: Review of Financial Studies, 2012, 25 (5), pp. 1457 - 1493
Issue Date:: 2012-05-01

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Field	Value	Language
dc.contributor.author	Easley, D	en_US
dc.contributor.author	López De Prado, MM	en_US
dc.contributor.author	O'Hara, M	en_US
dc.date.issued	2012-05-01	en_US
dc.identifier.citation	Review of Financial Studies, 2012, 25 (5), pp. 1457 - 1493	en_US
dc.identifier.issn	0893-9454	en_US
dc.identifier.uri	http://hdl.handle.net/10453/114993
dc.description.abstract	Order flow is toxic when it adversely selects market makers, who may be unaware they are providing liquidity at a loss. We present a new procedure to estimate flow toxicity based on volume imbalance and trade intensity (the VPIN toxicity metric). VPIN is updated in volume time, making it applicable to the high-frequency world, and it does not require the intermediate estimation of non-observable parameters or the application of numerical methods. It does require trades classified as buys or sells, and we develop a new bulk volume classification procedure that we argue is more useful in high-frequency markets than standard classification procedures. We show that the VPIN metric is a useful indicator of short-term, toxicity-induced volatility. © The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.	en_US
dc.relation.ispartof	Review of Financial Studies	en_US
dc.relation.isbasedon	10.1093/rfs/hhs053	en_US
dc.subject.classification	Finance	en_US
dc.title	Flow toxicity and liquidity in a high-frequency world	en_US
dc.type	Journal Article
utslib.citation.volume	5	en_US
utslib.citation.volume	25	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
utslib.for	1401 Economic Theory	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
utslib.copyright.status	closed_access
pubs.issue	5	en_US
pubs.publication-status	Published	en_US
pubs.volume	25	en_US

Abstract:

Order flow is toxic when it adversely selects market makers, who may be unaware they are providing liquidity at a loss. We present a new procedure to estimate flow toxicity based on volume imbalance and trade intensity (the VPIN toxicity metric). VPIN is updated in volume time, making it applicable to the high-frequency world, and it does not require the intermediate estimation of non-observable parameters or the application of numerical methods. It does require trades classified as buys or sells, and we develop a new bulk volume classification procedure that we argue is more useful in high-frequency markets than standard classification procedures. We show that the VPIN metric is a useful indicator of short-term, toxicity-induced volatility. © The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/114993