Modeling Transaction Data of Trade Direction and Estimation of Probability of Informed Trading

Anthony Tay, Christopher Ting, Yiu Kuen Tse, Mitch Warachka
Paper No. 13-2007

This paper implements the Asymmetric Autoregressive Conditional Duration (AACD) model of Bauwens and Giot (2003) to analyze irregularly spaced transaction data of trade direction, namely buy versus sell orders. We examine the influence of lagged transaction duration, lagged volume and lagged trade direction on transaction duration and direction. Our results are applied to estimate the probability of informed trading (PIN) based on the Easley, Hvidkjaer and OHara (2002) framework. Unlike the Easley- Hvidkjaer-OHara model, which uses the daily aggregate number of buy and sell orders, the AACD model makes full use of transaction data and allows for interactions between buy and sell orders.