Convergence to market efficiency of top losers
Date Issued
2008
Date
2008
Author(s)
Shih, Chun-Chi
Abstract
The concepts of market efficiency have drawn much attention in finance field. In the real world, however, it takes time for the market to react and reveal the information. The central goal of this thesis is to present evidence about the important issue: convergence to market efficiency.irstly, we selected 70 samples of daily top losers from July 2006 to December 2006 and applied the OLS method and GARCH model to examine whether order imbalance have significant influence on stock return. We found that the significance of order imbalance coefficients decreased with increasing time interval (5, 10 and 15-min), indicating evidences on convergence to market efficiency. Similarly, we used the GARCH model to test the relation between order imbalance and volatility. Again, the significant coefficients have a declining pattern which also supported the convergence to market efficiency.hen, we ran the regression on small firm effect. The expected negative relation between order imbalance coefficients and market capitalization was not achieved; as a consequence, the empirical results cannot make any conclusion on small firm effect. inally, we developed an imbalance-based trading strategy and made profit from these daily top losers. Our strategy was to short sell when seeing the first seller-initiated order imbalance and immediately buy back the underlying when the order imbalance transfer to buyer-initiated. We applied many methods in testing our strategy, such as using trading price or bid-ask price to evaluate the performance of the strategy, and selecting order imbalance with 0% or 90% truncation. All of them performed better than the original buy and hold rate of return.
Subjects
market efficiency
order imbalance
Type
thesis
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