Asymmetric Relationship Between Order Imbalance and Realized Volatility: Evidence from the Australian Market
29 Pages Posted: 2 Jan 2019 Last revised: 25 May 2019
Date Written: December 17, 2018
This paper examines the effect of order imbalance on realized volatility in the Australian stock market for the period between August 2007 and May 2016. To analyse this asymmetric relationship, we decompose order imbalance into buyer- and seller-initiated trades and capture good and bad volatilities by using realized semivariances. We find that the effect of seller-/buyer-initiated trade on bad/good volatility is asymmetric. Specifically, the effect of seller-initiated trade on bad volatility is consistently larger than that of buyer-initiated trade on good volatility. On the other hand, while seller-initiated trade has no significant effect on good volatility, buyer-initiated trade has significantly reduced the bad volatility. We conclude that the number of trades and trade volume have an impact on realized volatility, irrespective of the components of realized volatility.
Keywords: Order Imbalance, Realized Volatility, Realized Semivariances, Buyer- Versus Seller-Initiated Trades, ASX50
JEL Classification: G14, G15
Suggested Citation: Suggested Citation