Anomaly Outlook
Liquidity · Easley, Hvidkjaer and O'Hara (2002)

Probability of Informed Trading (PIN)

A market-microstructure estimate of the share of trading volume driven by informed investors from a sequential trade model, with year-t estimates used to forecast year t+1 returns. Long high minus short low portfolio built as the original paper built it (its sort, weighting and stock screens, as replicated by Open Source Asset Pricing), hedged each month with a rolling 5-year market beta from prior months only (β = −1.55 at the end of the sample). Quarterly, 1997Q1 to 2013Q4.

Predicted alphareturn · posterior mean, % per year, averaged over the window
Next quarter
2027Q1
11.96%
95% interval −2.66% to 25.81%
Next year
2027Q1–2027Q4
11.92%
95% interval −2.75% to 25.81%
Next five years
2027Q1–2031Q4
11.75%
95% interval −3.28% to 25.81%

Forecast made 1 Oct 2026, conditioning on this portfolio's returns, which end 2013Q4 with Open Source Asset Pricing's data for the signal (ProbInformedTrading). The 52 quarters between then and 2027Q1 are unobserved and are integrated out under the model.

Market hedge
Prior beliefsDefault
Half life of shocks to the edge How long an edge lasts once it appears. The model treats the edge -- the expected alpha under a market hedge, the expected return without one -- as a mean-reverting state; this is the prior on its half-life. A short half-life pulls the forecast back toward the long-run mean quickly, so recent performance counts for less. Short U(0, 5 years)Default U(0, 10 years)Long U(0, 20 years)
Long-run performance How much long-run edge the model is willing to believe in before the data insists on it. The prior on the portfolio's annualized risk-adjusted return (its information ratio under a hedge, Sharpe ratio without one) is centred on zero; this is its width. A narrow prior takes more evidence to move, so every forecast is pulled harder toward zero. Skeptical N(0, 0.2²)Default N(0, 0.4²)Permissive N(0, 0.6²)
Time variation in risk-adjusted returns How far an edge swings around its long-run level. The previous row sets how large that long-run level may be; this one sets how much the portfolio's risk-adjusted return wanders above and below it from quarter to quarter. Allow more, and a good or bad run reads as news about the edge rather than as noise. Conservative U(0, 0.25)Default U(0, 0.5)Aggressive U(0, 0.75)

The site's quintile and decile portfolios are sorted over stocks above the NYSE 20th size percentile, and too few of those carry this signal to form them. Only the original paper's portfolio, as replicated by Open Source Asset Pricing, is shown.

Cumulative market-hedged returnreturn, unhedged

+770% since 1997Q1 · log scale

Past performance, annualized

Window AlphaReturn Vol. Info. ratioSharpe ratio t-stat
1997Q1–2013Q4 17.95% 31.31% 0.57 2.36
2009Q1–2013Q4 12.69% 38.79% 0.33 0.73
2013Q1–2013Q4 47.51% 27.44% 1.73 1.73

Forecast information ratioSharpe ratio, annualized

Window Mean 95% interval P(neg)
2027Q1 0.38 −0.08 – 0.82 0.05
2027Q1–2027Q4 0.37 −0.08 – 0.80 0.05
2027Q1–2031Q4 0.33 −0.08 – 0.77 0.06
Prior changed from site default.
Category
Liquidity
Form
Continuous
Sorted on
High minus low
Names per leg
22 long / 22 short median · 13 at the 10th pctile
Original sample
1984–1998