SiraprapaWatakit

5502310013
OverviewandContribution
TheoreticalBackgroundandModel
M th d l dE i i lR lt MethodologyandEmpiricalResults
Conclusion
Overview
Thepaperexplainsabouttheeffectsofliquidity,information
towardsinfrequentlytradedstocks towardsinfrequentlytradedstocks
TheB/Aspreadofactive/inactivestocksareusuallylargebecauseof3
components(1.inventorycost/liquidityeffect2.marketpower
* i f ti b d) *3.informationbased)
Theresearchareaisimportantnotonlytoacademicbutalsotopolicy
maker Whatisthebestwaytostructureatradingsystemfor
i i l d d k ? inactivelytradedstocks?
Withtradedataandnewtechnique,themajorfindingisthatthe
informationbased componentisthemostimportantfactorforthe
inactivestock
Contribution
Newempiricaltechnique,probabilityofinformedtrading(PIN) p q p y g
TradeProcess
MarketMakerModel:Wheremarketmakersquotebid/askandare
assumedriskneutral,themodelisamixofdiscrete/continuos time
Investor: InformedandUninformed
Orderflow: Poissonprocess withthefollowingprobability Orderflow: Poissonprocess,withthefollowingprobability
Informationeventoccurs/notoccurs:o,1o
Bad/Goodnewsarrival: o,1o
Uninformed/Informedtradersarrival:c,
Notes: thesesetupareforallsinglestockswithexpectationof1
t d dth k t k i B i eventperday,andthemarketmakerisaBayesian
Intreediagram
Ifthereisnonews,onlyc
tradersparticipate
ifthereisnews,goodor ifthereisnews,goodor
bad,bothc and
participate
MarketMaker: MarketMaker:
AsheisaBayesian,hewouldupdatehispostbeliefsasaccordingtoa
priorbeliefs,heknowstherewouldbe3possibleoutcomeineachday
Nonews,Good News(heavybuy),BadNews(heavysell)
Givenasellorderatt,theprobabilityofbidis
Sameideaforask
Thevalueofastockisanaverageamongthethreepossibleoutcome
Substituteinb/aequationyields
Hence,thespreadiscalculateasfollow
Theprobabilityofinformedtrade
Allparametersu=(o,o,c,) canbedirectly modelwithalikelihood
function
Onceallparametersareestimated,wecandirectly calculateforthe p , y
proportionofinformedanduninformedtradeineachparticularstock
Data
NYSEtradeandCRSP: tradesaredistinguishbyLeeandReady NYSEtradeandCRSP: tradesaredistinguishbyLeeandReady
method,andonlycommonequityareconsidered
Volumeportfolios: Allsamplearecategorizeintodeciles,butonly
h h
mosthighvolumestockrank1
st
,medium5
th
andlow8
th
areanalyze
Active Inactive
Table1
c and aremostlyparticipate
in1
st
andmuchlessin5
th
and8
th
Prob(Inf) issmallin1
st
but
graduallyincreasesin5
th
and8
th
graduallyincreasesin5 and8
Table2
C fi th tP b(I f) i ConfirmsthatProb(Inf) is
significantandstatisticallydifferentacrossdecile
TheCDFalsoshowsthethe Prob(Inf)isstrongestonthe8
th
,which
meansthatProb(Inf)mightbeanimportantfactorintheb/aspread
T bl fi di id i t kb i ti Table3confirmsspreadiswideningasstockbecomemoreinactive
Hence,todeterminewhichfactorsdrivethespread,werun
regressionofspread vs liquidity andinformation factor regressionofspread vs.liquidity andinformation factor
Model
Ifthemodeliscorrect,weexpect|1 tobepositiveand|2 tobe
negative,asaccordingtoCDFandTable3
Results
Table4confirmstheexpectation
verysignificant
andpositive also andpositive,also
highR2
Giventhenewempiricaltechnique
Wecandirectlyestimatehowmanyinformedanduninformedtraders
Wecanalsoconfirmthatprobabilityofinformedtradeisanimportant
factorswhichdeterminethespread,especialininactive/lowvolume
tradingstocks tradingstocks
Tominimizethespreadofinactivestock,giventhesefinding,we
shouldencouragethepolicywhichpromotesgreater
t /di l fi f ti transparency/disclosureofinformation