Predictability of Order Imbalance, Market Quality and Equity Cost of Capital

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See all articles by Daniele Bianchi

Daniele Bianchi

University of Warwick - Finance Group

Matthias Büchner

University of Warwick - Warwick Business School

Roman Kozhan

University of Warwick - Warwick Business School

Date Written: December 6, 2018

Abstract

We study the effect of the predictability of daily order imbalance on market quality on a stock-by-stock basis for a large cross-section of U.S equities from 1997 to 2013. Empirically, we show that increasing order imbalance predictability corresponds to significantly higher market liquidity and efficiency. Such positive relationship is economically significant: a long-short portfolio based on past predictability generates significant risk-adjusted returns. In addition, we provide evidence that the predictability of order imbalance proxies for a risk factor that is significantly priced in the cross-section of stock returns, controlling for a variety of conventional sources of systematic risks. These results suggest the existence of a tight link between market microstructure features affecting order imbalance predictability and both market quality and the cost of capital of firms.

Keywords: Order Imbalance Predictability, Market Efficiency, Liquidity Provision, Asymmetric Information

JEL Classification: G10, G11, G14, G17

Suggested Citation

Bianchi, Daniele and Büchner, Matthias and Kozhan, Roman, Predictability of Order Imbalance, Market Quality and Equity Cost of Capital (December 6, 2018). Available at SSRN: https://ssrn.com/abstract=

Daniele Bianchi (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://whitesphd.com/

Matthias Büchner

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Roman Kozhan

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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