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Seminar 217, Risk Management: Could Probability of Informed Trading Predict Market Volatility?

Seminar: Risk Seminar | April 19 | 12:30-2 p.m. | 1011 Evans Hall

Speaker: John Wu, LBL

Center for Risk Management Research

Significant market events such as Flash Crash of 2010 undermine the trust of the capital market system. An ability to forecast such events would give market participants and regulators time to react to such events and mitigate their impact. For this reason, there have been a number of attempts to develop early warning indicators. In this work, we explore one such indicator named Probability of Informed Trading (typically shorten as PIN) and its variants. In an earlier test, a variant known as VPIN was demonstrated to show a strong signal more than an hour before the Flash Crash of 2010. There have been a number of articles published on whether or not the VPIN signal is accidental. By employing a supercomputer, we are able to systematically examine the effectiveness of a number of variants of PIN. In this talk, we will discuss how the computing power helps us explore the parameters controlling the performance of PIN, leading us to find more effective way to use PIN.