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Order imbalance and stock returns: New evidence from the Chinese stock market
Author(s) -
Zhang Ting,
Jiang George J.,
Zhou WeiXing
Publication year - 2021
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12684
Subject(s) - stock (firearms) , economics , sharpe ratio , stock market , financial economics , econometrics , growth stock , inventory turnover , order (exchange) , stock market bubble , monetary economics , stock exchange , portfolio , finance , mechanical engineering , paleontology , horse , engineering , biology
We examine the relation between daily order imbalance and stock returns in the Chinese stock market. We show that lagged order imbalance significantly and negatively predicts future stock returns. In addition, the predictive relation is robust for size and turnover subsamples, but stronger for small stocks and stocks with high turnover. Finally, we show that a dynamic trading strategy based on lagged order imbalance generates positive returns with a Sharpe ratio much higher than those of passive strategies. Our results shed new light on the role of inventory effects in stock price movements in an order‐driven market.