Order Flow, Trading Volume, and Short-term Stock Returns

Abstract

This paper tests whether net order flow (or signed trading volume, the difference between public buy order volume and public sell order volume) helps predict short term future returns. It finds that net order flow does not explain daily and weekly return autocovariances. Thus, short term return reversals or continuations are not likely to be due to information asymmetry or public liquidity shocks as modeled in Llorente, Michaely, Saar, Wang (2000) and similar previous studies. I also compare my results to those of similar empirical studies that test these models by using trading volume.