Order imbalance and returns: evidence from India
10 Nov 2013-International Journal of Managerial Finance (Emerald Group Publishing Limited)-Vol. 9, Iss: 2, pp 92-109
TL;DR: In this article, the empirical relationship between order imbalance and returns in the backdrop of structural changes in the Indian market was investigated using hypothesis testing and dummy variable regression, which showed that order imbalance has significantly reduced post the structural reforms at the daily as well as intra-day intervals across trade.
Abstract: Purpose – The purpose of this paper is to study the empirical relationship between order imbalance and returns in the backdrop of structural changes in the Indian market.Design/methodology/approach – The study makes use of hypothesis testing and dummy variable regression to investigate the relationship between order imbalance and returns during the period 1999‐2005, which saw definitive change in the structure of the Indian markets.Findings – Order imbalance (buying or selling pressure) has significantly reduced post the structural reforms at the daily as well as intra‐day intervals across trade, as well as value measures of order imbalance. After controlling for the number of transactions, order imbalance and return correlations have fallen in the post‐2002 period as compared to the pre‐2002 period, at daily as well as intra‐day intervals. Further, after controlling for past high and low returns, order imbalance exhibits day of the week effect in the pre‐2002 period while no such effect is seen in the po...
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TL;DR: This paper examined the relation between order imbalances and stock returns in China during the extreme market situations in 2007 and 2008 and found that order imbalance is positively and signifiant to stock returns.
Abstract: This article examines the relation between order imbalances and stock returns in China during the extreme market situations in 2007 and 2008. We find that order imbalances are positively and signif...
6 citations
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01 Jan 2016TL;DR: In this paper, the authors analyzed the simultan eity between trading volume and order imbalance, the influence of past performance, market risk, market capitalization, tick size to the trading volume, and influence of tick size, depth and bid-ask spread to the order imbalance of companies that were listed on LQ 45 index.
Abstract: The purpose of this research is to analyze the simultan eity between trading volume and order imbalance, the influence of past performance, market risk, market capitalization, tick size to the trading volume and the influence of tick size, depth and bid-ask spread to the order imbalance of companies that were listed on LQ 45 index. The samples in this research were selected by using the purposive sampling method with some selected criteria. Fifty-five companies listed on 2014’s LQ 45 index were chosen as the sample. The results showed that the trading volume is simultaneously related to the order imbalance; past performance, market risk, and market capitalization have the positive and significant effect to the trading volume; tick size has the negative and significant effect to the trading volume; the order imbalance has the negative and insignificant effect to the trading volume; tick size, depth, bid-ask spread, and trading volume have no significant effect to the order imbalance.
1 citations
TL;DR: In this paper, the price impact of order flow in the world's largest soybean meal futures markets was studied and it was shown that incoming orders can be used to explain and predict future price changes.
Abstract: We study the price impact of order flow in the world's largest soybean meal futures markets. Our intraday results indicate that incoming orders can be used to explain and predict future price changes. Our results are shown to be robust to various order flow measures, price aggregation approaches and data frequencies. We find that order flow imbalance (OFI) is a more all‐encompassing measure carrying greater information about price change relative to both trade imbalance (TI) and volume. Moreover, while both OFI and TI are shown to predict future price changes, this predictability diminishes over longer measure and price change frequency horizons.
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TL;DR: In this paper, Bhandari et al. found that the relationship between market/3 and average return is flat, even when 3 is the only explanatory variable, and when the tests allow for variation in 3 that is unrelated to size.
Abstract: Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.
14,517 citations
TL;DR: Scholes et al. as discussed by the authors examined the relationship between the total market value of the common stock of a firm and its return and found that small firms had higher risk adjusted returns than large firms.
5,997 citations
TL;DR: In this paper, the authors evaluate alternative methods for classifying individual trades as market buy or market sell orders using intraday trade and quote data and identify two serious potential problems with this method, namely, that quotes are often recorded ahead of the trade that triggered them and that trades inside the spread are not readily classifiable.
Abstract: This paper evaluates alternative methods for classifying individual trades as market buy or market sell orders using intraday trade and quote data. We document two potential problems with quote-based methods of trade classification: quotes may be recorded ahead of trades that triggered them, and trades inside the spread are not readily classifiable. These problems are analyzed in the context of the interaction between exchange floor agents. We then propose and test relatively simple procedures for improving trade classifications. THE INCREASING AVAILABILITY OF intraday trade and quote data is opening new frontiers for financial market research. The improved ability to discern whether a trade was a buy order or a sell order is of particular importance. In Hasbrouck (1988), the classification of trades as buys or sells is used to test asymmetric-information and inventory-control theories of specialist behavior. In Blume, MacKinlay, and Terker (1989), a buy-sell classification is used to measure order imbalance in tests of breakdowns in the linkage between S&P stocks and non-S&P stocks during the crash of October, 1987. In Harris (1989), an increase in the ratio of buys to sells is used to explain the anomalous behavior of closing prices. In Lee (1990), the imbalance in buy-sell orders is used to measure the market response to an information event. In Holthausen, Leftwich, and Mayers (1987), a buy-sell classification is used to examine the differential effect of buyer-initiated and seller-initiated block trades. Most past studies have classified trades as buys or sells by comparing the trade price to the quote prices in effect at the time of the trade. In this paper, we identify two serious potential problems with this method, namely, that quotes are often recorded ahead of the trade that triggered them, and that
3,301 citations
TL;DR: In this article, the authors determine empirically whether the investment performance of common stocks is related to their P/E ratios, and they find that returns on stocks with low PE ratios tend to be larger than warranted by the underlying risks, even after adjusting for any additional search and transactions costs, and differential taxes.
Abstract: IN AN EFFICIENT CAPITAL MARKET, security prices fully reflect available information in a rapid and unbiased fashion and thus provide unbiased estimates of the underlying values. While there is substantial empirical evidence supporting the efficient market hypothesis,' many still question its validity. One such group believes that price-earnings (P/E) ratios are indicators of the future investment performance of a security. Proponents of this price-ratio hypothesis claim that low P/E securities will tend to outperform high P/E stocks.2 In short, prices of securities are biased, and the P/E ratio is an indicator of this bias.3 A finding that returns on stocks with low P/E ratios tends to be larger than warranted by the underlying risks, even after adjusting for any additional search and transactions costs, and differential taxes, would be inconsistent with the efficient market hypothesis.4 The purpose of this paper is to determine empirically whether the investment performance of common stocks is related to their P/E ratios. In Section II data, sample, and estimation procedures are outlined. Empirical results are discussed in Section III, and conclusions and implications are given in Section IV.
2,593 citations
TL;DR: In this paper, the authors reviewed previous and current research on the relation between price changes and trading volume in financial markets, and made four contributions: two empirical relations are established: volume is positively related to the magnitude of the price change and, in equity markets, to the price changes per se.
Abstract: This paper reviews previous and current research on the relation between price changes and trading volume in financial markets, and makes four contributions. First, two empirical relations are established: volume is positively related to the magnitude of the price change and, in equity markets, to the price change per se. Second, previous theoretical research on the price-volume relation is summarized and critiqued, and major insights are emphasized. Third, a simple model of the price-volume relation is proposed that is consistent with several seemingly unrelated or contradictory observations. And fourth, several directions for future research are identified.
2,572 citations