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Probability of Informed Trading

  1. Soeren Hvidkjaer

Published Online: 15 MAY 2010

DOI: 10.1002/9780470061602.eqf18013

Encyclopedia of Quantitative Finance

Encyclopedia of Quantitative Finance

How to Cite

Hvidkjaer, S. 2010. Probability of Informed Trading. Encyclopedia of Quantitative Finance. .

Author Information

  1. Copenhagen Business School, Copenhagen, Denmark

Publication History

  1. Published Online: 15 MAY 2010

Abstract

The extent of private information in markets is a critical determinant in the price formation process. By modeling the trading process and the market maker's learning process, we can use trade data to make inferences about this private information or, more precisely, about the probability of informed trading (PIN). This article presents the PIN model, shows how to estimate the model via maximum likelihood, and discusses applications in market microstruture and asset pricing.

Keywords:

  • market microstructure;
  • PIN;
  • asymmetric information;
  • asset pricing;
  • cost of capital