Analysis of the Tick Rule and Bulk Volume Classification algorithms in the Brazilian stock market

ABSTRACT

This study aimed to compare the performance of Tick Rule (TR) and Bulk Volume Classification (BVC) models in classifying assets traded on the Brazilian stock exchange (B3) and indicate which one performs better as an investment decision tool. The assets were split into three groups based on their volume, and actual data was used to assess the accuracy of both algorithms. Data from 2018 was used to estimate the parameters that best fit BVC, and transactions from 2019 were used to test the algorithm’s efficiency. Afterward, the Volume-Synchronized Probability of Informed Trading (VPIN) was calculated for each asset using TR and BVC, and the values obtained were compared against VPIN calculated using real data. In conclusion, the TR algorithm shows betters performance than BVC for all three groups of assets. Analysis of the properties of both methods reveals that the base upon which the TR is built holds up in the Brazilian market, whereas BVC mechanics does not reflect the observed reality.

Keywords:
Tick Rule; Bulk Volume Classification; VPIN; Market microstructure