PIN, Adjusted PIN, and PSOS: Difference of Opinion in the Korean Stock Market

• Date: 01 June 2017
• Author: Jangkoo Kang,Kyong Shik Eom,Kyung Yoon Kwon
• Published date: 01 June 2017
• DOI: http://doi.org/10.1111/ajfs.12177

PIN

, Adjusted

PIN

, and

PSOS

: Difference of

Opinion in the Korean Stock Market*

Kyong Shik Eom

Center for Risk Management Research, University of California at Berkeley, United States

Jangkoo Kang

College of Business, Korea Advanced Institute of Science and Technology, Republic of Korea

Kyung Yoon Kwon**

College of Business, Korea Advanced Institute of Science and Technology, Republic of Korea

Received 19 August 2016; Accepted 20 December 2016

Abstract

Duarte and Young (2009) decompose the probability of information-based trading PIN into

adjusted PIN (AdjPIN) and probability of trading caused by symmetric order flow shocks

(PSOS). We explore sources of PSOS in the Korean stock market and examine the relation

between PSOS and stock returns. Using transaction data with trader types and initiator infor-

mation, we find that AdjPIN is not priced, while PSOS is negatively priced, a finding that Lai

et al. (2014) label “puzzling.” We find that the negative price of PSOS comes from differences

of opinion among domestic individual investors on the significance of public news.

Keywords PIN; Information risk; Asset pricing; Difference of opinion; Individual investor

JEL Classification: G12,G14

1. Introduction

Easley and O’Hara (1992) and their subsequent papers

1

propose a measurement of

the probability of information-based trading (PIN) and empirically validate it.

Duarte and Young (2009) (hereafter DY), however, document that the original PIN

model fails to explain two well-known stylized facts in US stock markets: the

*The authors are very grateful for helpful discussions with Robert Anderson, Jong-Ho Park,

and seminar participants at the Korea Advanced Institute of Science and Technology (KAIST)

and the University of Seoul. All errors are the responsibility of the authors.

**Corresponding author: Kyung Yoon Kwon, College of Business, Korea Advanced Institute

of Science and Technology; 85 Hoegiro, Dongdaemoon-gu, Seoul, 02455, South Korea. Tel:

+82-2-958-3693, Fax: +82-2-958-3620, email: noldya@business.kaist.ac.kr.

1

A short list of papers by Easley and O’Hara and their coauthors regarding PIN includes Eas-

ley et al. (1996, 2002, 2010), and Easley and O’Hara (2004).

Asia-Pacific Journal of Financial Studies (2017) 46, 463–490 doi:10.1111/ajfs.12177

©2017 Korean Securities Association 463

positive correlation between the numbers of buyer-initiated and seller-initiated

trades, and the high volatilities of buyer-initiated and seller-initiated trades. DY sug-

gest an adjusted PIN model that replaces the original PIN measure with two mea-

sures, adjusted probability of informed trading (AdjPIN) and probability of trading

caused by symmetric order flow shocks (PSOS) arising from public informati on.

As for the Korean stock market, the existing empirical studies also raise a ques-

tion of whether PIN is an appropriate proxy for the information risk, or whether

PIN is a significant determinant of expected returns (see Table 1). Specifically, Eom

et al. (2016) report that the problems of the original PIN model using US data, as

reported in DY, also exist in the Korean stock market, and among five variants of

DY’s adjusted PIN model, the model without any restriction fits the Korean market

data best.

In this paper, adopting DY’s adjusted PIN model, we examine the pricing effects

of PSOS. We mainly focus on explaining the puzzling “negative” and significant

relation between PSOS and expected stock returns, which has been reported in glo-

bal markets except the US, by investigating the sources of the symmetric order flow

Table 1 Findings from PIN models in the Korean stock markets

This table presents previous findings on the performance of the PIN models in Korean stock markets.

Authors Sample period Findings

Choe and Yang (2006) January 2002 to

March 2002

PIN shows little correlation with other measures

for information asymmetry while others are

closely correlated with each other; it also shows

an insignificant relation with the expected stock

returns

Choe and Yang (2007) January 1993 to

December 2004

PIN is not significantly priced while other

measures for information risk are significantly

priced

Park and Eom (2008) January 1997 to

December 2005

AdjPIN generally shows a significant relation

with the expected stock returns while PIN does

not. The original PIN model does not fit

Korean stock market data, but is only useful

for detecting the private-information risk that

occurs during an extremely short period of time

Hwang et al. (2013) January 2000 to

December 2004

AdjPIN is significantly related to the expected

return, which is measured by the implied cost

of equity capital, while PIN is not

Lai et al. (2014) January 1997 to

December 2010

Both PIN and AdjPIN are not significantly priced

in international stock markets including the

Korean stock market

Eom et al. (2016) January 2001 to

December 2006

The original PIN model does not fit the Korean

stock market data

K. S. Eom et al.

464 ©2017 Korean Securities Association