Convergence to Market Efficiency of NASDAQ Hedging Stock
Date Issued
2008
Date
2008
Author(s)
Yang, Ming-Yu
Abstract
For a long time, the trading volume has been playing an important role in the stock market. Furthermore, investors usually utilize order imbalance as an indicator to earn abnormal returns. Among previous studies, Chordia and Subrahmanyzm (2004) found the positive relationship between order imbalances and stock returns. However, this relation will become insignificant as the time interval increases. In the efficient market, speculative investors find it difficult to profit only by observing the order imbalances.n this paper, we select the hedging stocks as our sample stocks using the criteria of stationary price, declining volume and price range. Furthermore, we examine how long within the day the effect of order imbalances on prices lasts. The empirical results of this paper show that more than 50% of the samples have significant positive correlation between order imbalances and stock return in five to ten-minutes time interval, but only 30.95% in fifteen-minute time interval. This result provides strong evidence that the market is getting more efficient as the time interval becomes longer We also employ OLS model to examine the small firm effect in five to fifteen- minutes time interval respectively. According to the empirical results of this paper, we are not allowed to make a conclusion that there exists a small firm effect in our sample data. Finally, with the help of the previous results, we develop the order imbalances based trading strategy. That is to say, in each time interval, if order imbalances are positive, we long this stock, and sell it when the order imbalances turn negative. The result presents that the return from truncated trading strategy is better than non-truncated one. Similarly, the return in shorter time interval also performs better than it does in longer time interval.
Subjects
Order Imbalance
Convergence to Market Efficiency
Type
thesis
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