Volatility of order imbalance of institutional traders and expected asset returns: Evidence from Taiwan

Abstract

We use the newly-developed “volatility of order imbalance” of Chordia et al. (2019) to examine the relation between information asymmetry costs and expected returns across various types of institutional traders, taking advantage of a unique account-level transaction dataset on the Taiwan Futures Exchange. Our results show that the measure of foreign institutional traders is positively related to future market returns, regardless of whether weekly or monthly frequencies are examined. Turning to stock transaction data on institutional investors, the information risk of foreign institutional investors generates risk-adjusted monthly return differentials in the cross-section. Finally, vector autoregression analyses show that with an increase in the order imbalance volatility of foreign institutional investors in the index futures market, there is a corresponding increase in subsequent order imbalance volatility in the stock market, thereby providing evidence of a monthly lead-lag relation between the futures market and the spot market.