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We study if VPIN (Easley et al., 2012a) is an efficient advance indicator of toxicity-induced liquidity crises and related sharp price movements. We find that high VPIN readings rarely signal… Click to show full abstract
We study if VPIN (Easley et al., 2012a) is an efficient advance indicator of toxicity-induced liquidity crises and related sharp price movements. We find that high VPIN readings rarely signal abnormal illiquidity, and very occasionally anticipate large intraday price changes leading to actual trading halts. We find significant differences in illiquidity and price impact between VPIN-identified toxic and non-toxic halts, but they tend to vanish when we control for ex ante realized volatility. We conclude that the capacity of VPIN to anticipate truly toxic events is limited.
Journal Title: Journal of Banking and Finance
Year Published: 2018
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