Estimating the probability of informed trading on the JSE

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Estimating the probability of informed trading on
the JSE JH Venter and DCJ de Jongh
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Outline
Outline

• Review of the EKOP model
• Problems with the model
• A news noise extension EKOPX
• Properties of EKOPX
• News noise time dependence
• EKOP-PLN and Importance Sampling
• Conclusion

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Outline
EKOP model

• Easley, Kiefer, OHara and Paperman Liquidity,
  Information and Infrequently Traded Stocks, J.
  Finance 1996

LiqBuy e LiqSell e InfSell m
L d
I a
H 1-d
LiqBuy e LiqSell e InfBuy m
N 1-a
LiqBuy e LiqSell e
Observe Btotal no of buys, S total no sells
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EKOP Model assumptions
Outline
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EKOP Likelihood and PI
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Example Anglo Am PLC
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Estimates Anglo Am PLC
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Problems with EKOP spread
Outline
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Problems with EKOP P-P plot
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Problems with EKOP spread
Outline
Simulated buys/sells at estimated parameters
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EKOPX news noise
Outline

• Public news and announcements, analyst reports,
  market speculation may affect the propensity
  to buy or sell of both liquidity and informed
  traders
• News noise severity varies from day to day
• News noise causes dependence by affecting both
  buyers and sellers
• News noise causes additional spread not catered
  for sufficiently in Poisson process assumption

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EKOPX model assumptions
Outline
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EKOPX (B,S) marginal
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EKOPX Likelihood
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Estimates Anglo Am PLC
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Properties of EKOPX spread
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Properties of EKOPX P-P Plot
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Biases of EKOP vs EKOPX
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EKOPX applied
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Brown and Hillegeist (2005) Disclosure quality
and the information environment applied the
EKOPX model to the data of some 2500 US stocks
and found that in all but 4 of them the fit was
much improved over that of EKOP
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News noise time dependence
Outline
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EKOP-PLN
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EKOP-PLN (B,S) marginal
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EKOP-PLN Likelihood
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Estimates Anglo Am PLC
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Conclusion
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