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Will Order Imbalances Predict Stock Returns in Extreme Market Situations? Evidence from China

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  • Lanjun Lao
  • Shu Tian
  • Qidan Zhao

Abstract

This article examines the relation between order imbalances and stock returns in China during the extreme market situations in 2007 and 2008. We find that order imbalances are positively and significantly related to contemporaneous stock returns but have limited predictability for subsequent returns in extreme market situations. Moreover, order imbalances significantly predict returns in normal market environment, especially for small stocks. This may be attributed to the investor structure in the Chinese market. A trading strategy utilizing the relation between order imbalances and stock returns generates positive returns. Overall, the information contents of order imbalances vary with the market environment.

Suggested Citation

  • Lanjun Lao & Shu Tian & Qidan Zhao, 2018. "Will Order Imbalances Predict Stock Returns in Extreme Market Situations? Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(4), pages 921-934, March.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:4:p:921-934
    DOI: 10.1080/1540496X.2016.1278364
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    Cited by:

    1. Xiaojun Chu & Jianying Qiu, 2021. "Forecasting stock returns using first half an hour order imbalance," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3236-3245, July.
    2. Muzhao Jin & Fearghal Kearney & Youwei Li & Yung Chiang Yang, 2023. "Order book price impact in the Chinese soybean futures market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 606-625, January.

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