The Information Content of Order Imbalance Volatility: Evidence From Account-Level Trading Activities on the Taiwan Futures Market

Abstract

Exploiting the advantage of unique account-level transaction data from Taiwan’s futures market, this study examines the effectiveness of the newly-developed “order imbalance volatility” measure (Chordia, Hu, Subrahmanyam, and Tong, 2017) in capturing the informed trading activities of various trader groups in an emerging market. Our empirical findings show that the order imbalance volatility of foreign institutional traders significantly predicts next-day market returns. The measure’s predictive ability is more pronounced when market illiquidity or economic uncertainty are higher. In addition, we find that subsequent purchase transactions in the stock market increase as the order imbalance volatility of foreign institutional investors increases — evidence of an information spillover effect from the futures market to its spot market. Order imbalance volatility proves valid for different intraday sampling frequencies and alternative measures of trading activity and can be found in the options market as well.

Keywords: Order Imbalance Volatility; Emerging Market; Information Asymmetry; Foreign Institutional Investors

JEL Classification: G14