Order Imbalance and Return Predictability: Evidence from Korean Index Futures

Abstract

The higher the ratio of buy-order quantities minus sell-order quantities to the entire limit order book quantity, the higher the future returns in the next 5- to 20-minute intervals. The order imbalance predicts the size of future retums as well. In addition, the ratio of trading volume to open interests predicts the direction and size of future retums. These novel findings are obtained from analyzing all the open limit-order book information provided in a real-time basis for the KOSPI200 futures. The findings suggest that traders can use aggregate quantities of buy versus sell orders in order to optimize their trades.