Order imbalances explain 90% of returns of Nikkei 225 futures

Abstract

This article introduces a new kind of order imbalance - limit order imbalance - in addition to the conventional order imbalance to explain the intraday stock returns. The conventional order imbalance together with our new order imbalance are shown to explain more than 90% of intraday returns of the Nikkei 225 Futures in the Osaka Stock Exchange in Japan. It is also found that a scaling by spreads substantially increases the explanatory power in thinner markets.

Liquidity of financial markets: a review

“…The literature on complex instruments, e.g. derivatives is limited (Li et al, 2010;Syamala et al, 2014).…”

Order Flow Imbalance Effects on the German Stock Market

“…Moreover, by including both market orders and marketable limit orders (marketable limit orders are limit buy orders above the ask quote or limit sell orders below the bid), all traders demanding immediacy in execution are included. Li et al (2010) argue that withdrawing a limit buy (sell) order has the same effect as submitting a limit sell (buy) order. Including such canceled orders leads to a higher explanatory power of order imbalance for concurrent returns.…”

Drivers of seasonal return patterns in German stocks

“…By including both market orders and marketable limit orders, all traders demanding immediacy in execution are included in our order imbalance measure. However, the data do not contain canceled limit orders, which might have further increased the explanatory power of the imbalance measure (see Li et al 2010). Our approach in calculating order imbalance follows that of most previous studies.…”