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Order imbalance, liquidity, and market returns

Chordia, Tarun and Roll, Richard and Subrahmanyam, Avanidhar (2002) Order imbalance, liquidity, and market returns. Journal of Financial Economics, 65 (1). pp. 111-130. ISSN 0304-405X. doi:10.1016/S0304-405X(02)00136-8.

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Traditionally, volume has provided the link between trading activity and returns. We focus on a hitherto unexplored but intuitive measure of trading activity: the aggregate daily order imbalance, buy orders less sell orders, on the New York Stock Exchange. Order imbalance increases following market declines and vice versa, which reveals that investors are contrarians on aggregate. Order imbalances in either direction, excess buy or sell orders, reduce liquidity. Market-wide returns are strongly affected by contemporaneous and lagged order imbalances. Market returns reverse themselves after high-negative-imbalance, large-negative-return days. Even after controlling for aggregate volume and liquidity, market returns are affected by order imbalance.

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Additional Information:© 2002 Published by Elsevier B.V. Received 16 October 2000, Accepted 1 May 2001, Available online 30 May 2002. This paper owes significant debt to Charles Lee and Mark Ready for developing the trade signing algorithm. For helpful comments, we owe a debt of gratitude to an anonymous referee, Hank Bessembinder, Jeff Busse, Clifton Green, Paul Irvine, Jonathan Karpoff, Olivier Ledoit, Ross Valkanov, and Sunil Wahal.
Subject Keywords:Liquidity; Trading volume; Order imbalance
Issue or Number:1
Classification Code:JEL: G10; G82
Record Number:CaltechAUTHORS:20190501-103504927
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Official Citation:Tarun Chordia, Richard Roll, Avanidhar Subrahmanyam, Order imbalance, liquidity, and market returns, Journal of Financial Economics, Volume 65, Issue 1, 2002, Pages 111-130, ISSN 0304-405X, (
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:95132
Deposited By: Tony Diaz
Deposited On:01 May 2019 18:58
Last Modified:16 Nov 2021 17:10

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