Abstract
In this paper we estimate the probability of informed trading (Pi) in an order-driven stock market as well as perform a comprehensive analysis on the interrelations among probability of informed trading and three common performance indicators, i.e., liquidity, volatility and efficiency. We find that uninformed traders exhibit price chasing behavior even over very short time interval and that volatility in stock price attracts uninformed traders. Using 3SLS which takes into consideration the endogeneity of the probability of informed trading and the liquidity, volatility and efficiency measures, our empirical results provide new evidence on market microstructure literature. We find that Pi and the volatility and liquidity of stocks are simultaneously determined. Higher Pi leads to lower liquidity and higher volatility, and vice versa. Liquidity can explain volatility and efficiency, while the opposite is not true. Firms with larger size, higher ownership concentration and lower turnover have higher probability of informed trading.
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