Dynamic Intraday Relations between Order Imbalance, Volatility and Return of Jump Losers

Abstract

This study adopts intraday return instead of daily return used by previous researches to examine the effect of order imbalance not only on the individual stock return but also volatility among jump losers. We also build up order imbalance-based trading strategies to earn abnormal return.A contemporaneous order imbalance-return relation is examined by GARCH (1,1) model and time-series regression model. The data presents significantly positive relation in both models as previous studies on daily reurn. We focus on the lagged effect of imbalance on return and find that such relation is negatively significant, while contemporaneous imbalance has positive significant impact on return. We examine the volatility-order imbalance relationship by a time-varying GARCH (1,1) model. The positive relation of volatility and order imbalance is consistent with our ex ante expectatio n that larger imbalance make s return more volatile. Then, the small firm effect shows the weakly negative relation between order imbalance coefficient and market capitalization.We develop two order imbalance-based trading strategies based on different definitions of price: trading price and bid-ask. Due to the characteristics of our jump losers, we use short selling strategy. Our results show the huge profitability of order imbalance strategies when we trade on extreme volume.In order to explore the reason of profitable order imbalance based strategy, we investigate the causal relationship between return and order imbalance. We find that order imbalance is a good indicator of price discovery. Moreover, order imbalance apparently is an excellent indicator for return prediction in small firm size quartile.