The Effects Of Volume-Synchronized Probability Of Informed Trading On The Stock Volatility

The rapid development of computer technology brings great vitality to financial theory and practice, which directly reflected in the exponential growth of financial data. It is also in this context, the financial study based on the mass high-frequency data is able to rapidly develop and grow. This paper is mainly about the causal relationship between the volume-synchronized probability of informed trading and the stock volatility. Volume-synchronized probability of informed trading, also called VPIN, which was first proposed by Easley, Lopez and O'Hara, is a timely indicator of market information asymmetry. And the stock volatility is described by the realized volatility which was proposed by Anderson ans Bollerslev. The theory of VPIN and realized volatility will be introduced and discussed in detail in the third and fouth chapters of this paper. In the empirical studies of the relationship between VPIN and realized volatility, this paper obtained the following main conclusions. Firstly, VPIN can make early response to the abnormal fluctuations of the stock market. It means that stock VPIN is most likely to reach a new high before the “flash down” or a rapidly pull of market. Secondly, when we made regression equations between VPIN suquence and future realized volatility, we found that VPIN had outstanding explanatory power to future realized volatility, and the regression R-squared was generally close to 10%. In addition, VPIN is more powerful in the small-cap stocks compared to large-cap stocks. Thirdly, we used quantitative techniques to evaluate the practical performance of VPIN, and ultimately found VPIN an effective factor to generate low-risk portfolio, which could make the low-VPIN portfolio 60 percent lower of the average realized volatility from high-VPIN portfolio.