Identifying and Pricing Adverse Selection Risk with VPIN


We perform the first large-sample estimation of the Volume Synchronized Probability ofInformed Trading (VPIN) measure, validating it and performing pricing tests of informedtrading. The pricing of VPIN is not explained by firm characteristics. A portfolio long(short) high-VPIN (low-VPIN) stocks delivers a monthly five-factor alpha of .18%, whichrises to .29% when using a signed version of the measure (SVPIN). A long-short trade onSVPIN delivers an annualized five-factor BHAR of 11.45%. Incorporating a reversal in stockperformance in portfolio sorts on SVPIN improves BHARs to 17.34%

Nov 13, 2015
American University of Beirut Suliman S. Olayan School of Business
Stephen Rush
Assistant Professor of Finance

My research interests include Market Microstructure, Empirical Asset Pricing, and Investment Management