Defeating the VPIN: Slipping into the Noise

Abstract

We use the volume synchronized probability of informed trading (VPIN) to evaluate the performance of different trading strategies in an order-driven simulated market. The performance of this nonparametric metric is assessed in terms of informed traders exploiting its weaknesses when mimicking the trade behavior of uninformed traders and in its protection of market makers from the risk of trading with an informed trader. We show that an informed trader can accumulate a larger position while a pooling equilibrium holds by exploiting the VPIN structure, that the VPIN has a high rate of false-positives, and that it may detect informed trading under certain conditions.

TOPICS: Performance measurement, simulations, statistical methods