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Order imbalance and individual stock returns: theory and evidence

journal contribution
posted on 2004-06-01, 00:00 authored by Tarun ChordiaTarun Chordia, A Subrahmanyam
This paper studies the relation between order imbalances and daily returns of individual stocks. Our tests are motivated by a model which 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.

History

Journal

Journal of financial economics

Volume

72

Issue

3

Pagination

485 - 518

Publisher

Elsevier BV

Location

Amsterdam, The Netherlands

ISSN

0304-405X

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2003, Elsevier B.V.

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