Estimating the Adjusted Probability of Informed Trading Model; the Case Study of Financial Sector

Document Type : Original Article

Authors

Associate Professor in Economics, Department of Economics, University of Allemeh Tabataba’i University

Abstract

The level of information asymmetry in financial markets significantly influences market structure, stock prices, and investment risk. In addition, optimal policy design, particularly the implementation of trading constraints by regulators and the determination of trading strategies by traders, requires an awareness of the extent of information asymmetry. In this paper, using two models, Probability of Informed Trading (PIN) and Adjusted Probability of Informed Trading (AdjPIN), within the framework of financial market microstructure, we estimate the level of information asymmetry for 69 active companies in the financial intermediation sector during the period from 1396:Q1 to 1402:Q3. According to our findings, first, the average information asymmetry, as measured by PIN and AdjPIN, stands at 26% and 21% respectively. Second, information asymmetry surged notably in 2019, coinciding with the stock market bubble across all financial sub-sectors. Third, the banking and investment sectors, comprising 11% of stock market value, exhibit lower information asymmetry compared to the insurance and leasing sectors, which collectively contribute only 0.5% to the stock market value. Forth, large companies such as Bank Tejarat, Bank Mellat, Bimah Ma, Sarcheshme, and Saipa Leasing demonstrate lower probability of informed tradings compared to smaller counterparts like Bank Day, Bimah Karafarin, Kausar Bahman Investment, and Parsian Leasing. These findings underscore the significance of understanding information asymmetry for effective policy-making and investment decisions in financial markets.

Keywords

References

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