Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
961442 | Journal of Financial Markets | 2011 | 16 Pages |
Abstract
This study identifies a factor that leads to a bias in estimating the probability of informed trading (PIN), a widely-used microstructure measure. It is shown that, along with the numerical maximization of the likelihood function for PIN, the floating-point exception (i.e., overflow or underflow) may eliminate feasible solutions to the actual parameters in the optimization problem. Approximately 44% of PIN estimates for recent stock market data may have been subject to a downward bias that is more pronounced for active stocks than for inactive stocks. This study develops a remedy to mitigate the resulting bias.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Hsiou-Wei William Lin, Wen-Chyan Ke,