Order Flow Imbalance Effects on the German Stock Market

Michael Hanke,Michael Weigerding

doi:10.2139/ssrn.2233974

Abstract

Order flow imbalance refers to the difference between market buy and sell orders during a given period. This paper analyzes effects of order flow imbalance on returns of stocks traded on the German Xetra trading system on a daily basis. It is the first study examining this relation for the German stock market. In contrast to previous studies on other markets, we control for unobserved effects by using a fixed effects panel regression. For the concurrent (or conditional) relation between order imbalance and returns, our results confirm those of the literature. For the question of return predictability from past order imbalances (unconditional relation), our results are partly confirmatory. As a new contribution, we provide evidence for size and liquidity effects for the unconditional relation between order imbalance and returns.

Highlights

Neoclassical financial theory argues that the arrival of news is the major driver of asset prices
Studies based on a recent sample of daily order imbalances do not seem to exist: stock markets worldwide become more efficient, and it seems interesting whether effects documented for the 1990s still persist at daily frequencies
In contrast to the previous literature, we find imbalance effects to be weaker for very high levels of order imbalance

Summary

Introduction

Neoclassical financial theory argues that the arrival of news is the major driver of asset prices Focusing on those aspects that neoclassical finance usually assumes away, the (more recent) literature on market microstructure provides a wealth of models featuring effects on market prices that could not be explained in the neoclassical framework. In this literature, a number of papers investigate the effect of buying/selling pressure currently prevailing in the market for an asset on its price movements. The present paper analyzes effects of order imbalance on daily returns of German stocks. We are the first to analyze imbalance effects during the financial crisis and show that the concurrent relation has increased in that period

Methods

Results

Conclusion