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Order Imbalance, Liquidity, and Market Returns

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  • Chordia, Tarun
  • Roll, Richard
  • Subrahmanyam, Avanidhar

Abstract

Traditionally, volume has provided the link between trading activity and returns. We focus on a hitherto unexplored but intuitive measure of trading activity: the aggregate daily order imbalance on the New York Stock Exchange. Signed order imbalances increase (decrease) following market declines (rises), which reveals that investors are contrarians on aggregate. Order imbalances in either direction, either excess buy or sell orders, reduce liquidity. Market-wide returns are strongly affected by contemporaneous and lagged order imbalances. Market-wide returns reverse themselves after high negative imbalance, large negative return days; the magnitude of this reversal is partially predictable from the level of the imbalance and return. Even after controlling for aggregate market volume and liquidity, market returns are affected by order imbalance.

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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt7gh9t9w3.

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Date of creation: 12 Apr 2000
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Handle: RePEc:cdl:anderf:qt7gh9t9w3

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