71st International Atlantic Economic Conference

March 16 - 19, 2011 | Athens, Greece

Informed and Uninformed Trading on the Interbank EUR/PLN Market

Thursday, 17 March 2011: 10:00
Katarzyna Bien, Ph.D. , Institute of Econometrics, Warsaw School of Economics, Warsaw, Poland
This paper examines an intraday activity of banks trading the EUR/PLN currency pair via the Reuters Dealing 3000 Spot Matching System in 2007. On the grounds of the  sequential trade model  of ([Easley, Kiefer, O’Hara & Paperman (1996)] and [Easley, Engle, O’Hara & Wu (2008)]), we differentiate between the time-varying patterns for the strategic behavior of informed and uninformed (liquidity, noise) traders. We present evidence for the particular hour-of-day seasonality that characterizes the arrival of uninformed and informed traders. The conditional arrival rates for both traders’ categories enable assessment of their interactions and are used to forecast a time-varying probability of informed trading (PIN). The predictions of PIN are used to test the impact of information heterogeneity on the instantaneous liquidity proxied by the bid-ask spread and the market depth on the interbank EUR/PLN spot market.