Probability of Informed Trading
Published Online: 15 MAY 2010
Copyright © 2010 John Wiley & Sons, Ltd. All rights reserved.
Encyclopedia of Quantitative Finance
How to Cite
Hvidkjaer, S. 2010. Probability of Informed Trading. Encyclopedia of Quantitative Finance. .
- Published Online: 15 MAY 2010
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.
- market microstructure;
- asymmetric information;
- asset pricing;
- cost of capital