Orderimbalance, Liquidity and Market Returns
35 Pages Posted: 8 May 2001
Date Written: November 1, 2001
Abstract
We focus on an intuitive measure of trading activity: the aggregate daily order imbalance, buy orders less sell orders, on the NYSE. Order imbalance increases following market declines and vice versa, which reveals that investors are contrarians in aggregate. Order imbalances in either direction, excess buy or sell orders, reduce liquidity. Market-wide returns are strongly affected by contemporaneous and lagged order imbalances. Market returns reverse themselves after high negative imbalance, large negative return days. Even after controlling for aggregate volume and liquidity, market returns are affected by order imbalance.
Keywords: Order Imbalance, Liquidity, Trading Volume, Transactions
JEL Classification: G23, D82
Suggested Citation: Suggested Citation
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