Initial Return, Order Imbalance, and Volatility of IPO
Date Issued
2007
Date
2007
Author(s)
Chen, Yi-Hua
Abstract
In this paper, we investigate the relationship among initial return, volatility and order imbalances of IPOs. Consistent with theory, the result of GARCH (1,1) model shows that order imbalances also have significant impact on initial return of IPO stocks. Further, the GARCH (1,1) model testing the relation between volatility and order imbalance suggests that volatility will arise as long as there comes in a large order imbalance order and vice versa. n the further study of time-series regression to test the relation between order imbalances and return, we find that contemporaneous order imbalance has a good explanatory power to return. As for lagged order imbalances, only lag-one imbalances are significant negative related to return. We also have the same result in another regression test of lag-one effect. At last, we use market capitalization as the proxy of private information to investigate the relation between market capitalizations and order imbalances. The result shows that the small size effect indeed exists in IPO stocks. In the end, we build four trading strategies and compare their returns to initial return. Unfortunately, we conclude that observing order imbalance as a trading rule cannot contribute higher returns than the average initial return of IPO.
Subjects
IPO
Order Imbalance
Volatility
Information Asymmetry
Type
thesis
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