Convergence to Market Efficiency of Top Losers

28 Pages Posted: 28 Nov 2010

See all articles by Yong-chern Su

Yong-chern Su

National Taiwan University

Han-Ching Samprass huang

Chung Yuan Christian University

Chun-Chi Shih

National Taiwan University

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2010

Abstract

We use top losers to examine convergence speed of order imbalance on stock return since order imbalance has been claimed to be a state variable in cross sectional return. We found that significance of order imbalance coefficients decreased with increasing time interval (5, 10 and 15-min), indicating evidences on convergence to market efficiency. We also employ a time varying GARCH model to examine the relation between order imbalance and volatility. Again, the significance of order imbalance coefficients shows a decay pattern which also supports convergence to market efficiency hypothesis. We suspect that small firm effect plays a role in convergence. However, our empirical results do not suggest an expected negative relation between order imbalance coefficients and market capitalization.

Finally, we developed an imbalance-based trading strategy and made profit from these daily top losers. We short sell seller- initiated order imbalances and buy back buyer-initiated order imbalances. We try many scenarios in testing our strategy. All of them outperformed buy and hold strategy. In order to explain the profitability of order imbalance based strategy, we examine the causal relationship between return and order imbalance. We find that order imbalance is a good indicator of price discovery under our nested causality framework.

Suggested Citation

Su, Yong-chern and huang, Han-Ching Samprass and Shih, Chun-Chi, Convergence to Market Efficiency of Top Losers (September 1, 2010). Available at SSRN: https://ssrn.com/abstract=1669900 or http://dx.doi.org/10.2139/ssrn.1669900

Yong-chern Su (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

Han-Ching Samprass Huang

Chung Yuan Christian University ( email )

22 Pu-Jen, Pu-chung Li
Chung-Li, 32023
Taiwan

Chun-Chi Shih

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

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