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Order Imbalance and Individual Stock Returns

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  • Chordia, Tarun
  • Subrahmanyam, Avanidhar
Abstract
This paper studies the relation between order imbalances and daily returns of individual stocks. Our tests are motivated by a model which explicitly considers how market makers dynamically accommodate autocorrelated imbalances emanating from large traders who optimally choose to split their orders. Price pressures caused by autocorrelated imbalances cause a positive relation between lagged imbalances and returns, which reverses sign after controlling for the current imbalance. We find empirical evidence consistent with these implications. We also find that imbalance-based trading strategies yield statistically significant returns. Our results shed light on the role of inventory effects in daily stock price movements.

Suggested Citation

  • Chordia, Tarun & Subrahmanyam, Avanidhar, 2000. "Order Imbalance and Individual Stock Returns," University of California at Los Angeles, Anderson Graduate School of Management qt34k8f3pv, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt34k8f3pv
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