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Order imbalance and stock returns: New evidence from the Chinese stock market

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  • Ting Zhang
  • George J. Jiang
  • Wei‐Xing Zhou

Abstract

We examine the relation between daily order imbalance and stock returns in the Chinese stock market. We show that lagged order imbalance significantly and negatively predicts future stock returns. In addition, the predictive relation is robust for size and turnover subsamples, but stronger for small stocks and stocks with high turnover. Finally, we show that a dynamic trading strategy based on lagged order imbalance generates positive returns with a Sharpe ratio much higher than those of passive strategies. Our results shed new light on the role of inventory effects in stock price movements in an order‐driven market.

Suggested Citation

  • Ting Zhang & George J. Jiang & Wei‐Xing Zhou, 2021. "Order imbalance and stock returns: New evidence from the Chinese stock market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 2809-2836, June.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:2:p:2809-2836
    DOI: 10.1111/acfi.12684
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