The Probability of Informed Trading and the Performance of Stock in an Order-Driven Market

We estimate the probability of informed trading (Pi) in an order-driven stock market and perform a comprehensive analysis on the interrelations among Pi and three common performance indicators: liquidity, volatility, and efficiency. We find that uninformed traders exhibit price chasing behavior, and price volatility attracts uninformed traders. Using 3SLS which considers the endogeneity of Pi and the liquidity, volatility and efficiency measures, we find that Pi and the volatility and liquidity are simultaneously determined. Higher Pi leads to lower liquidity and higher volatility, and vice versa. Firms with larger size, higher ownership concentration, and lower turnover have higher Pi.