Order imbalance and stock returns: Evidence from China

Abstract

We investigate the relation between daily order imbalance and return in the Chinese stock markets of Shenzhen and Shanghai. Prior studies have found that daily order imbalance is predictive of subsequent returns. On the Chinese exchanges we find autocorrelation in order imbalances is similar to that of the New York Stock Exchange as reported by Chordia and Subrahmanyam (2004). We also find a strong contemporaneous relation between daily order imbalances and return. However, we do not find evidence that order imbalances predict subsequent returns. We attribute the difference in predicative power to differences in trading mechanisms on the two exchanges and to differences in the share turnover rate.