Order Imbalance and Returns: Evidence of Lead-Lag Relationship

The IUP Journal of Financial Risk Management, Vol. XI, No. 2, June 2014, pp. 34-48

Posted: 29 Jan 2015

See all articles by Nikhil Rastogi

Nikhil Rastogi

Institute of Chartered Financial Analysts of India (ICFAI)

V. N. Reddy

Institute of Chartered Financial Analysts of India (ICFAI) - The Icfai University (IFHE), Hyderabad

Kiran Kumar Kotha

Indian Institute of Management (IIM), Indore

Date Written: January 23, 2015

Abstract

The paper explores the lead-lag relationship between the variables of order imbalance and return in futures and spot markets. Order imbalance is defined as the difference between buyer and seller initiated trades. Using tick test, the trades have been classified as buyer and seller initiated. The paper finds positive correlation between the variables of order imbalance in the futures market and the returns in the spot market. This relationship is further explored using a VAR framework for daily as well as a shorter interval of 120 min. The results reveal that even after controlling for lagged futures and spot returns, the futures market imbalance has a significant effect on spot market returns.

Suggested Citation

Rastogi, Nikhil and Reddy, Vanga Nagi and Kotha, Kiran Kumar, Order Imbalance and Returns: Evidence of Lead-Lag Relationship (January 23, 2015). The IUP Journal of Financial Risk Management, Vol. XI, No. 2, June 2014, pp. 34-48. Available at SSRN: https://ssrn.com/abstract=2554221

Nikhil Rastogi (Contact Author)

Institute of Chartered Financial Analysts of India (ICFAI) ( email )

62, Nagarjuna Hill
Panjagutta
Hyderabad, TX AP 501504
India

Vanga Nagi Reddy

Institute of Chartered Financial Analysts of India (ICFAI) - The Icfai University (IFHE), Hyderabad ( email )

Donthanapally Shankarapalli Road
RAJAWALA ROAD
Hyderabad, RI Andhra Pradesh 501203
India

Kiran Kumar Kotha

Indian Institute of Management (IIM), Indore ( email )

Prabandh Sikhar
Rau-Pithampur Road
Indore, Madhya Pradesh 453331
India

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