Order Imbalance Theory and Stock Returns-Evidence From TSEC Taiwan 50 Index
Date Issued
2008
Date
2008
Author(s)
Hung, Chia-Hung
Abstract
The main purpose of this study is to investigate the evidence of the linkage between daily order imbalance and daily returns of individual stock in the Taiwan stock market and examine “Order Imbalance Theory” which is reported by Chordia and Subrahmanyam [Chordia, T. & Subrahmanyam, A（2004）. Order imbalance and individual stock ruturns: Theory and evidence. Journal of Financial Economics, 72, 485-518] by TSEC Taiwan 50 Index（from 2005/5/16 to 2008/4/7）. The result is:. In equilibrium, the discretionary liquidity trader splits his order across the two periods, so that equilibrium order imbalances are positively autocorrelated. It is similar to that of the New York Stock Exchange as reported by Chordia and Subrahmanyam (2004).. The expectation of the price change P2 - P1 conditional on the contemporaneous and lagged order imbalances; respectively, is linear in these variables. The coefficient of contemporaneous order imbalance is positive while that of lagged order imbalances is negative.. However, there is no evidence that lagged order imbalances predict subsequent returns. The difference in predicative power could be attributed to differences in trading mechanisms on the two exchanges and to differences in the turnover rates.
Subjects
Order imbalance
stock return
market microstructure
Type
thesis
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