Does Informed Trading Probability VPIN Have Pricing Power?

Information asymmetry has always been a hot topic in the theory of financial market microstructure,especially the research on its influence on asset prices.In the microstructure theory,traders are usually divided into informed traders and non-informed traders.Probability of informed trading is also used to measure the degree of information asymmetry in the market.The most classic is the EKOP model proposed by Easley et al.(1996)to calculate the probability of informed trading_PIN.But with the development of high-frequency trading and high-frequency data availability,Based on the theory of the PIN model,Easley et al.(2011)proposes a new method to calculate the probability of informed trading which is named as VPIN model,overcoming the problem of complex maximum likelihood estimation in PIN calculation and improving the real time of measure.At present,domestic and foreign researches on the relationship between information asymmetry and asset pricing are mostly based on PIN model,and few literatures have explored the pricing power of VPIN.At the same time,China’s stock market is still in the early stage of development which means the system construction in all aspects is not perfect.The structure of investors,mainly retail investors,is significantly different from that of other developed countries.Therefore,information asymmetry is of particular concern.In this context,this paper has certain theoretical and practical significance for the pricing research of VPIN.The calculation of VPIN index is the basic work of this paper.In this paper,the A-share and GEM stocks selected from January 2010 to December 2016,were taken as the research samples.VPIN model was used to obtain the informed trading probability VPIN of each stock according to the high-frequency trading data.In the empirical study,the pricing power of VPIN is tested initially.Through univariate grouping and bivariate grouping analysis,it is found that there is significant information asymmetry risk premium in China’s stock market.The Fama-Macbeth two-step regression method was used to obtain that VPIN has significant explanatory power for the cross-sectional returns of China’s stock market.Secondly,whether VPIN can be used as an asset pricing factor is studied.In this paper,based on the factor construction method of Fama-French(2015a),information risk factor UMD was constructed by using VPIN,which was added to the Fama-French three-factor pricing model to establish a new four-factor pricing model,and the time series regression of portfolio returns was carried out in the sample period spanning 84 months.The regression results show that the information risk factor UMD has a very good performance in explaining the portfolio return rate.Furthermore,through GRS test,it is found that information risk factor UMD can significantly improve the explanatory efficiency of the pricing model in China’s stock market.Based on the above empirical results,it can be concluded that there is a positive information risk premium in China’s stock market,and VPIN can be used as a pricing factor to show a good ability of price discovery.Therefore,this paper suggests that relevant regulatory authorities should encourage the development and expansion of the group of institutional investors,guide listed companies to establish a sound information disclosure system,and consider the inclusion of VPIN in the stock risk warning mechanism,in order to promote the healthy and sustainable development of the stock market and better serve the real economy.