Limit Order Imbalances and Return Predictability
42 Pages Posted: 9 May 2004
Abstract
An event study methodology is employed to examine the size and predictability of stock price movements subsequent to the occurrence of a limit order imbalance. Whilst existing studies have examined the association between price pressure and stock prices, there has been no research that has directly examined whether information regarding outstanding limit order imbalances at the end of the trading day can be used to predict subsequent stock price movements. The results indicate that a statistically significant mean positive (negative) abnormal return of 0.63 percent (0.64 percent) is experienced on the day subsequent to a buyside (sell-side) order imbalance. Also statistically significant is the finding that 60.00 percent of abnormal returns for firms experiencing buy-side imbalances are positive and 62.15 percent of abnormal returns for firms experiencing sell-side imbalances are negative, suggesting some degree of predictability. It should be noted however, that whilst the size of the abnormal returns and the ratio of positive-to-negative abnormal returns are statistically significant, they are possibly not economically significant in terms of implementing a profitable trading strategy.
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