Will Order Imbalances Predict Stock Returns in Extreme Market Situations? Evidence from China

摘要

This article examines the relation between order imbalances and stock returns in China during the extreme market situations in 2007 and 2008. We find that order imbalances are positively and significantly related to contemporaneous stock returns but have limited predictability for subsequent returns in extreme market situations. Moreover, order imbalances significantly predict returns in normal market environment, especially for small stocks. This may be attributed to the investor structure in the Chinese market. A trading strategy utilizing the relation between order imbalances and stock returns generates positive returns. Overall, the information contents of order imbalances vary with the market environment.