Study Of Order Flow Imbalance And Information Arrival

Market microstructure theory suggests that information influences investors’expectations of asset prices, which determine the demand of investors.The demandreflected in price and volume, in the form of orders, promotes the formation of assetprices. Order flow, as an information carrier of the microstructure, containinginvestors’ information, value judgments and trading preferences, is a key to reveal themechanism of price formation and discovery. Based on market microstructure theory,this paper constructs a new indicator called order flow imbalance, using the data fromlimit order book, to portray the information contained in order flow, and empiricallytests its influence on asset price fluctuation, especially in the situation of the publicinformation arrival and the generalized unexpected information arrival. Specificstudies and conclusions include the following aspects.Price impact of order flow imbalance. Based on the information of order book,this paper constructs a new order flow imbalance indicator. The empirical resultsshow that the indicator has a positive significant impact on stock price, which isstronger than the impact from the transaction data-based order flow imbalanceindicator. Thus, the indicator can be a better characterization of investors’ transactionwill and behavior, and more fully depict the information about asset price contained inlimit order book and order flow.Public information arrival and order flow imbalance. With order flow imbalanceindicator as an intermediate variable for information transduction, this paper usesevent study method to observe the dynamics of abnormal order flow imbalance andabnormal earning during the period of public information arrival, and introduces thefactor of public information arrival into the regress equation between order flowimbalance and stock return. The regression results show that public informationarrival will significantly enhance the order flow imbalance’s price impact.Generalized unexpected information arrival and order flow imbalance. Using theintraday extreme price changes in stock markets as the characterization of generalizedunexpected information arrival, and the order book-based order flow imbalanceindicator as an intermediary variable of information transmission, this study showsthat the liquidity, price and order flow will significantly fluctuate in similar mode during the period of information arrival. The regression between order imbalance andreturn shows that order flow imbalance has a significant and sustained influence onthe price fluctuation after the information arrival, reflecting the process of investors’information studying and transaction adjusting.