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Flow Toxicity and Liquidity in a High-frequency World
Ist Teil von
The Review of financial studies, 2012-05, Vol.25 (5), p.1457-1493
Ort / Verlag
Oxford: Oxford University Press
Erscheinungsjahr
2012
Link zum Volltext
Quelle
Business Source Ultimate
Beschreibungen/Notizen
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.