The Financial Review 47 (2012) 697–718

Order Imbalance and Daily Momentum

Investing: Evidence from Taiwan
Chiao-Yi Chang∗
National Taichung University of Science and Technology

Abstract

We propose that price-order-imbalance momentum strategies will produce outcomes that

are more profitable for investors than price momentum strategies in the very short term.
Adopting order imbalances information, investors themselves may employ untraded order data
or exhibit herding behavior following others’ investing decisions related to order imbalance.
Taiwan stock market investors have easy access to order imbalance information. This suggests
that, in this emerging market, a strategy considering order imbalance may be more descriptive
of investor behavior than a price momentum strategy.

Keywords: order imbalance, momentum, underreaction

JEL Classifications: G12, G14

1. Introduction
The research on investment strategies suggests that profits from momentum
strategies are significantly positive. This strategy argues that investors who buy pre-
vious overperforming stocks and sell previous underperforming stocks, will accrue
significantly positive profits from self-financed investing. Jegadeesh and Titman

∗ Correspondingauthor: Department of Insurance and Finance, National Taichung University of Science

and Technology, No. 129 Sec. 3, Sanmin Road, Taichung City 404, Taiwan, R.O.C.; Phone: +(886)4-
22196145; Fax: +(886)4-22196141; E-mail: cyc@nutc.edu.tw.
The author would like to thank the anonymous referees.


C 2012, The Eastern Finance Association 697
698 C.-Y. Chang/The Financial Review 47 (2012) 697–718

(1993) produce the first study on momentum investing strategy. Evidence supporting
the momentum effect has accumulated in recent years from diverse locations (Foer-
ster, Prihar and Schmitz, 1995; Kan and Kirikos, 1996; Richards, 1996; Rouwenhorst,
1998; van der Hart, Slagter and van Dijk, 2003; Patro and Wu, 2004). The source of
momentum profits increasingly is an object of study (Moskowitz and Grinblatt, 1999;
George and Hwang, 2004; Arena, Haggard and Yan, 2008; Park, 2010). George and
Hwang (2004) argue that good news arriving recently, such as price levels (i.e., 52-
week high), are a more important determinant of momentum effects than historical
price changes (i.e., past returns computed over the previous several months). Blume,
Easley and O’Hara (1994) argue that investors are interested in information on past
price and volume. Trading volume is thus another reference point against which in-
vestors evaluate arriving news. However, volume has lacked the attention that price
has received in existing studies. Lee and Swaminathan (2000) support the idea that
past trading volume predicts the magnitude and persistence of price momentum. Our
study specifically focuses on order imbalance as a key piece of information, rather
than trading volume in general, to investigate the momentum effect. Order imbal-
ance arises when buy orders greatly outnumber sell orders. With signs of positive or
negative direction, order imbalances offer more information than simple volume for
liquidity measures. The order imbalance metric measures trading activity, intensity,
and strength of trading directions.
Order imbalance represents the strength of trading activities against which
traders measure the probability of loss. If investors read a positive order imbalance,
where buying orders outnumbers selling orders, they determine the timing conducive
to enter the market. This circumstance reinforces buyers’ confidence while weak-
ening sellers’ confidence. The impact of a positive order imbalance continuously
pushes up the winner stock. By contrast, a negative order imbalance discourages buy-
ers. Such a circumstance reinforces the seller’s confidence and weakens the buyer’s
confidence. A negative order imbalance thus forces losing stocks down further. When
the order imbalance of an individual stock is positive (negative), traders adjust their
expectations regarding stock returns, which push the price up (down). Thus, traders’
confidence results in price-order-imbalance momentum.
In addition to confidence, another important emotion is enthusiasm or eagerness
to trade. Investors with unfilled orders believe stocks that have not traded are valuable
because these investors are in a hurry to execute their trades. Today’s positive order
imbalance means more buying orders have not yet been matched, and buyers may
be eager to buy tomorrow. Therefore, higher stock prices follow a positive order
imbalance. Similarly, lower stock prices follow a negative order imbalance.
Previous studies examine price momentum based on sorting returns from the
prior several months and holding the portfolio for several months. However, relatively
few papers describe shorter formation and holding periods such as several days.
Our research documents the daily price momentum and daily price-order-imbalance
momentum effects. Investors can shorten their investing horizon and exploit effects
more frequently, rather than waiting several months.
 C.-Y. Chang/The Financial Review 47 (2012) 697–718 699

Focusing on the Taiwan stock market has two advantages. The first advantage
of the Taiwan sample frame is that both the Taiwan Stock Exchange (TSE) and news
services report buying and selling orders. The TSE releases accumulated unexecuted
buy or sell order data of the Taiwan Stock Exchange Capitalization Weighted Stock
Index (TAIEX) once every minute1 and discloses the volume of unexecuted orders at
best five bid and ask prices of individual stocks every 20 seconds during the trading
session.
The second advantage is that domestic individual investors constituted 70.56%
of all Taiwan stock market participants in 2006 and 60.21% in 2007. Previous studies
agree that institutional investor sentiments are more rational than individual investor
sentiments (Verma and Verma, 2008). Our study uses daily frequency data, without
monthly frequency, to determine the momentum portfolio. This is because of the
greater possibility of nonrational behavior among individual investors than among
institutional investors.
The preceding discussion suggests two primary research issues as follows: first,
whether the information about order imbalance helps to enhance the profits of a
momentum strategy, and second, whether an order imbalance strategy dominates
the price momentum strategy. Our research suggests that carefully chosen criteria
about the price-order-imbalance momentum effect can screen the winners and losers
from among a list of companies in the Taiwan stock market, with an order-driven
mechanism. In addition, unlike typical momentum evidence, which uses several
months for intermediate horizons, we examine empirical results through daily data
and daily investing strategies.
Empirical results support a conclusion that information about order imbalances
affects the continuation of past returns and helps produce more profitable outcomes
for investors compared to price momentum strategies. A partial explanation for these
results may be that the information about order imbalances represents the investors’
eagerness to trade an individual stock.

2. Data and portfolio formations

Winner/loser portfolios are formed using daily stock returns collected from the
TSE database during the period July 1, 2006 through June 30, 2007. During this
period, 140 days (56%) have positive returns, while 108 days (43%) have negative
returns. Due to data limitations, our sample size is limited to only one year of data. This
study uses the daily frequency rather than monthly because the daily data enhances the
occurrence frequency of nonrational behavior because individual investors in Taiwan
constitute the largest proportion of participants. Individual investors track past returns
less rationally than institutional investors. The number of listed companies may vary

1 Investorscan inquire about the real-time accumulated unexecuted buy or sell orders of TAIEX every 15
seconds from TSE’s website (http://mis.twse.com.tw/) after Jan 17, 2011. The website also offers TAIEX’s
daily data of accumulated unexecuted buy or sell orders.
700 C.-Y. Chang/The Financial Review 47 (2012) 697–718

because of newly listed or delisted stocks. The number of listed companies in the
data ranges from 684 to 690. For each day, all stocks are ranked according to their
cumulative return or order imbalance in the last j days of the formation and holding
period. Any stocks lacking complete data during the formation or holding period are
excluded from the analysis.
Consistent with previous studies, at every day t, stocks are ranked in ascending
order based on accumulated returns of stock i in prior j days for j = 1, 2, . . . , 9, 10,
and 20. The accumulated returns of stock i are then examined for k days, k = 1, 2,
. . . , 9, 10, and 20 after portfolio formation. Our study forms portfolios using daily
data for very short terms—less than 20 business days or about one month.
Our research sets j = k in empirical specifications. Thus, the single index j is
used to indicate both the sorting period and the holding period. The j-day-horizon
strategy suggests making a portfolio based on the past j-day returns and holding
the position for j days. Returns of portfolios are calculated by an equally weighted
average. The price momentum winners (losers) represent the top (bottom) one-third
of stocks ranked by accumulated returns from the prior j days. The self-financing
momentum strategy is constructed by purchasing (selling) the top (bottom) one-third
of stocks sorted by accumulated returns from the prior j days and holding for j days.
Our study calculated daily order imbalance data by summing all the orders of
individual stocks from the intraday data. The order imbalance measured on day t is
the ratio of difference between buying volume and selling volume compared to the
trading volume. The order imbalance, ROIBi,t , is defined as the proportion of order
sizes of firm i at time t:
n
 m

NBi,j,t − NSi,j,t
j =1 j =1
ROIBi,t = . (1)
VOLi,t
The suffix t denotes day t. Suffix j is the frequency of orders from buyers or
sellers of firm i. Note that NB and NS are intraday data that denote the buying and
selling order sizes, respectively.2 Note that VOLi,t is the trading volume of firm i on
day t. The numbers of buy orders and sell orders are n and m, respectively.
The order imbalance strategy is derived through the same method. The order
imbalance winners (losers) represent the top (bottom) one-third of stocks ranked by
order imbalance from the prior j days. The self-financing order imbalance strategy is
constructed to long (short) the largest (smallest) tertile of order imbalance from the
prior j days and holding for j days.
Table 1 presents the summary statistics on the daily return and order imbalance.
The time series averages of the order imbalance of companies in the lowest tertile,

2 Because there is no direct daily data available on buying and selling orders of individual stocks and the
daily data is summed by intraday data that is complex and rather expensive to obtain, our study employs
one-year intraday data for the sample frame.
Table 1
Descriptive statistics for daily return and order imbalance
This table reports summary statistics for daily returns of stock i for the period July 1, 2006–June, 30 2007. Note that ρi (k) is the kth order serial correlation of
(Ri,t , Ri,t−k ) or (ROIBi,t , ROIBi,t−k ). SD ρ(k) is cross-sectional standard deviations of the kth order serial correlation.

Ri,t ROIBi,t
Tertile 2 Tertile 2
Tertile 1 (−0.56%– Tertile 3 Tertile 1 (−0.25– Tertile 3
Average SD (≥−7.16%) 0.72%) (≤7.76%) Average SD (≥−288.98) 0.042) (≤57.49)
0.018% 0.075% −1.747% 0.051% 2.584% −0.530 6.161 −2.142 −0.106 1.194
n
 n

n−1 ρi (k) SD ρ(k) n−1 ρi (k) SD ρ(k)
i=1 i=1
ρ(1) 0.074 0.197 0.289 0.142
ρ(2) 0.010 0.182 0.165 0.127
ρ(3) 0.019 0.167 0.128 0.118
ρ(4) 0.009 0.157 0.107 0.111
ρ(5) 0.027 0.143 0.090 0.122
ρ(6) 0.010 0.137 0.081 0.115
ρ(7) 0.011 0.129 0.079 0.104
ρ(8) 0.004 0.123 0.066 0.102
C.-Y. Chang/The Financial Review 47 (2012) 697–718

ρ(9) −0.001 0.118 0.059 0.102

ρ(10) 0.029 0.110 0.059 0.096
ρ(20) 0.005 0.106 0.018 0.086
701
702 C.-Y. Chang/The Financial Review 47 (2012) 697–718

middle tertile, and the highest tertile every day are −2.142, −0.106, and 1.194,
respectively. The average of the order imbalance of all listed companies in the sample
period is −0.530. Although the sign of the average of order imbalance is negative,
the average of stock returns is positive (0.018%).
The fourth row in Table 1 reports the cross-sectional averages and cross-sectional
standard deviations of the kth order serial correlation of return and order imbalance
of individual stocks. Because the stocks are ranked according to their returns or order
imbalance in tertiles (this order changes daily), we cannot calculate the autocorrela-
tion of the stocks in any specific tertile. Observing the cross-sectional averages and
cross-sectional standard deviations of the kth order serial correlation, we find some
common points in the return and order imbalance. The kth order serial correlation of
return and order imbalances become increasingly smaller when the kth time interval
is increasingly larger. All the autocorrelations of order imbalance are positive and
larger than the autocorrelations of returns.

3. Empirical findings and momentum strategy

3.1. One-way strategy of daily price momentum or order imbalance
Table 2 reports average daily returns of winner, loser, and price momentum port-
folios of the 11 j-day-horizon investment strategies.3 Our study examines strategies
from a one-day horizon to a ten-day horizon. That is, these strategies are established
daily for two weeks. In addition, the discussion focuses on 20-day-horizon strategies
because 20 business days are approximately one month. The self-financing returns
for the one-, six-, and ten-day horizons are significantly positive. For instance, the
strategy returns for one- and six-day horizons are 0.198% and 1.639%, respectively.
The transaction cost columns report that profits are net of any transaction cost, which
on the TWSE includes a commission of 0.1425% for each trade and a transaction tax
of 0.3% on the gross dollar amount of each sale.
Further examination of the winner and loser portfolios reveals that returns are
all significantly positive; the returns from winner portfolios are much larger than
those from loser portfolios, especially for one-, six-, and ten-day-horizon strategies.
Consequently, the winner-loser portfolios can obtain positive profits.
Notably, the largest momentum profits are found for six-day-horizon strategies
(1.639%), rather than for other strategies. The largest returns from winners (2.2%)
and the smallest returns from losers (0.561%) comprise the largest self-financing
profits for the six-day-horizon strategies. The review frequency of individual stock
returns for one week is six days, not five days. Table 2 also reports the annual-
ized return of j-day-horizon strategies for comparison. The annualized return for-
mula is (1 + R%/k)250 − 1), where R% represents the returns of portfolios. The

3 All the t statistics are based on Newey and West (1987) covariance estimates which are consistent in the
presence of both heteroskedasticity and autocorrelation to calculate the adjusted t-statistics.
 C.-Y. Chang/The Financial Review 47 (2012) 697–718 703

Table 2
Profits from daily price momentum strategies
This table reports the average daily and annualized portfolio returns from the Taiwan Stock Exchange
(TSE) from July 1, 2006 through June 30, 2007 for price momentum. The winner (loser) portfolio is the
equally weighted portfolio of 30% of stocks with the highest (lowest) past j-day accumulated return. The
winner-loser strategy is constructed by purchasing (selling) the winners (losers) for holding j days. For
comparison, the strategy profits without and with transaction costs, including a transaction tax of 0.3% for
each sale and commission of 0.1425% for each trade, are reported. The t-statistic is based on Newey and
West (1987); covariance estimates are in parentheses.

Without transaction
cost With transaction cost
j-day Winner Annualized Loser Annualized Winner- Annualized Winner- Annualized
horizon (%) return(%) (%) return(%) loser(%) return(%) loser(%) return(%)
j=1 0.318∗∗∗ 121.367 0.121∗ 35.190 0.198∗∗∗ 63.842 −0.387∗∗∗ −62.098
(5.080) (1.913) (5.762) (−11.289)
2 0.444∗∗∗ 74.029 0.429∗∗∗ 70.927 0.014 1.819 −0.571∗∗∗ −51.041
(3.774) (3.576) (0.296) (−11.699)
3 0.621∗∗∗ 67.693 0.679∗∗∗ 75.966 −0.058 −4.712 −0.643∗∗∗ −41.512
(3.551) (4.003) (−0.768) (−8.530)
4 0.781∗∗∗ 62.887 0.882∗∗∗ 73.424 −0.100 −6.089 −0.686∗∗∗ −34.872
(3.526) (4.036) (−1.003) (−6.845)
5 1.017∗∗∗ 66.179 1.103∗∗∗ 73.498 −0.086 −4.228 −0.671∗∗∗ −28.531
(3.881) (4.263) (−0.722) (−5.612)
6 2.200∗∗∗ 149.674 0.561∗∗ 26.320 1.639∗∗∗ 97.777 1.054∗∗∗ 55.079
(7.794) (2.080) (12.173) (7.828)
7 1.532∗∗∗ 72.677 1.560∗∗∗ 74.473 −0.028 −1.011 −0.613∗∗∗ −19.681
(4.798) (5.038) (−0.186) (−4.013)
8 1.850∗∗∗ 78.132 1.758∗∗∗ 73.101 0.092 2.910 −0.493∗∗∗ −14.288
(5.253) (5.276) (0.535) (−2.876)
9 2.150∗∗∗ 81.584 1.913∗∗∗ 70.017 0.237 6.818 −0.348∗ −9.204
(5.578) (5.401) (1.244) (−1.820)
10 2.449∗∗∗ 84.336 2.066∗∗∗ 67.523 0.383∗ 10.058 −0.202 −4.915
(5.842) (5.567) (1.881) (−0.989)
20 4.582∗∗∗ 77.200 4.077∗∗∗ 66.390 0.505 6.510 −0.080 −0.999
(6.478) (6.498) (1.289) (−0.205)
∗∗∗ , ∗∗ , ∗ indicate statistical significance at the 0.01, 0.05 and 0.10 level, respectively.

six-day-horizon strategies have the largest annualized momentum returns (97.777%),

and (1, 1) strategies score the second highest (63.842%). The returns from daily mo-
mentum strategies are impressive. Again, very short-term momentum profits exist,
especially for six- and one-day horizon strategies. However, after considering any
transaction cost, all the strategy returns are negative except for the six-day horizon
(1.054%).
The trading mechanism of the Taiwan exchange suggests some reasons why such
high returns occur for the six-day strategy. The daily price limit, for any individual
704 C.-Y. Chang/The Financial Review 47 (2012) 697–718

share (maximum trading range), of 7% is pre-specified based on the previous day’s

closing price. Lehmann (1990) argues that price limits affect the average order balance
between patient and impatient traders. Kim and Rhee (1997) investigate the narrow
limits of the Tokyo Stock Exchange and addressed the delayed price discovery
hypothesis. The price limit prevents prices from efficiently reaching their equilibrium
level. Therefore, the closing price of stock in Taiwan may not reach its true intrinsic
value, with the price over the next several trading days, continuously adjusting in
response to the information. The adjustment procedure appears, in our data, to take
six days, with the largest profit at the six-day horizon.4
The adjustment procedure of price also is in line with the fact that investors
cannot respond to information immediately. Jegadeesh and Titman (1993) argue that
momentum is possibly due to underreaction. Six days may be the longest period of
accumulated underreaction for stock prices to news over time in Taiwan. We find clues
to this from the reversal signs of abnormal returns to news in Taiwan in event studies.
For example, Wang, Lin and Liu (2008) find that significant negative abnormal
returns through recommendatory stock of investment columns in Taiwan occurs the
first and seventh day after the announcement day, while the abnormal returns are not
significant from the second day to the sixth day. Similarly, Wang, Chiu, Chen, Yu and
Lin (2009) find that the abnormal returns of patent announcements from the Taiwan
electronic industry are positive for six days after event day but the abnormal returns
on the seventh day after event day are negative.
In contrast, in the United States, reversion is more typical at the daily frequency.
Lehmann (1990) explains that the bid-ask bounce effect gave the appearance of
pronounced negative serial correlation in daily data, and the use of weekly data to
investigate the momentum effect reduces the severity of the bid-ask spread bias.
Therefore, this study finds that momentum is possibly due to underreaction at a very
short horizon in Taiwan.
Surprisingly, the returns of loser portfolios are positive, not negative. There
are two possible explanations for this: First, this suggests that some investors, in
the very short term (less than one month), adopt contrarian investing strategies for
past loser stocks. These investors search for mispriced investments and buy past
losers. Such loser portfolios obtain positive returns. This does not mean momentum
investors do not exist within loser portfolios or that contrarian investors do not
exist within winner portfolios. A reasonable explanation for the winner portfolio is
that the power or number of contrarian investors is less than the power or number
of momentum investors. However, for the loser portfolio, the power or number of
contrarian investors is greater than the power or number of momentum investors.
Second, the profits of losers are positive even if they are smaller than those of winners.

4 The proportion of the trades which the stock price reaching to price limits to the trades which is included
in investing strategies in the samples is 2.19–6.58%. Because the ratio is not large enough to explain the
large profit at the six-day horizon, there potentially are other reasons our study does not discuss.
 C.-Y. Chang/The Financial Review 47 (2012) 697–718 705

The positive sign reflects that the Taiwan stock market is bullish during the sample
period.
Table 3 reports average daily returns of buying imbalance, selling imbalance,
and self-financing portfolios of the 11 horizons for making investment strategies. The
returns to these strategies are positive before any transaction cost, but negative after
transaction cost, except for the six-day-horizon strategies. The annualized returns of
order imbalance strategies are decreasing when the j-day horizons are increasing.
Although the profit of one-day-horizon strategies of annualized return (217.27%) is
the largest among all horizons without transaction cost, the high frequency to trade
erodes profits, resulting in the smallest amount (−26.67%). The only positive strategy
that includes transaction costs is the six-day-horizon strategies (8.97%).
For the cases without transaction cost, the annualized returns from one- to
five-day-horizon strategies, for buy imbalance (see Table 3), are larger than winners
(see Table 2) and for sell imbalance are smaller than losers. Therefore, the annual-
ized returns from one- to five-day-horizon strategies for order imbalance are much
larger than price momentum. The annualized returns from seven- to 20-day-horizon
strategies for buy imbalance in Table 3 are smaller than for winners in Table 2
and for sell imbalance, which also are smaller than for losers. Therefore, there are
no consistent superior profits for order imbalance from seven- to 20-day-horizon
strategies.
Although the only positive strategy, when including transaction cost, are the
six-day-horizon strategies, compared with Table 2, the annualized return of six-
day-horizon strategies, with order imbalance (8.973%), is much smaller than price
momentum (55.079%). The outperformance of price momentum for six-day-horizon
strategies is due to higher profits of winners compared to buy imbalance and lower
profits of losers compared to sell imbalance.
In brief, only the profits of six-day-horizon strategies, for the one-way strategy
of price and order imbalance, are positive after including transaction cost. The order
imbalance is superior to past returns for less than six-day horizons compared to the
structure momentum strategy, but the six-day-horizon strategy for price momentum
outperforms order imbalance.

3.2. Comparing the strategy profits of daily price momentum and the order
imbalance of the Taiwan stock index
Using cross-section regressions, resulting coefficients compare the two invest-
ing concepts of sorting stocks by past returns and order imbalances. Following the
approach of George and Hwang (2004), our study transforms the relevant frequency
and variables. The dependent variable in these regressions is the day-t return to stock
i, Ri,t . The independent variables are dummies that represent whether stock i is held
(long or short) on day t as part of one of the two strategies.
This investigation estimated cross-section regressions for one-, two-, . . . , ten-,
or 20-day-horizon strategies. The contributions of the winner or loser portfolios
Table 3
706
Profits from order imbalance strategies
This table reports the average daily and annualized portfolio returns from the Taiwan Stock Exchange (TSE) from July 1, 2006 through June 30, 2007 for the
order imbalance strategies. The buy (sell) imbalance portfolio is an equally weighted portfolio of 30% of stocks with the highest (lowest) past j-day accumulated
order imbalances. The order imbalances of individual stocks are calculated by summing all the orders from the intraday data to get the daily order imbalances
data. The buy-sell imbalance strategy is constructed by purchasing (selling) the buy imbalances (sell imbalances) portfolios for holding j days. For comparison,
the strategy profits without and with transaction costs, including a transaction tax of 0.3% for each sale and commission of 0.1425% for each trade, are reported.
The t-statistic is based on Newey and West (1987); covariance estimates are in parentheses.
Without transaction cost With transaction cost
Buy Sell Buy-sell Buy-sell
j-day imbalance Annualized imbalance Annualized imbalance Annualized imbalance Annualized
horizon (%) return(%) (%) return(%) (%) return(%) (%) return(%)
j=1 0.477∗ ∗ ∗ 228.574 0.014 3.579 0.463∗ ∗ ∗ 217.272 −0.124∗ ∗ ∗ −26.669
(7.718) (0.225) (14.880) (−3.999)
2 0.613∗ ∗ ∗ 114.932 0.216∗ ∗ 30.992 0.397∗ ∗ ∗ 64.167 −0.188∗ ∗ ∗ −20.953
(6.219) (2.047) (9.548) (−4.522)
3 0.800∗ ∗ ∗ 94.556 0.387∗ ∗ 37.973 0.413∗ ∗ ∗ 41.073 −0.172∗ ∗ ∗ −13.340
(5.623) (2.581) (7.268) (−3.022)
4 0.927∗ ∗ ∗ 78.323 0.570∗ ∗ ∗ 42.730 0.357∗ ∗ ∗ 24.978 −0.228∗ ∗ ∗ −13.290
(5.210) (2.917) (4.718) (−3.015)
5 1.054∗ ∗ ∗ 69.295 0.759∗ ∗ ∗ 46.102 0.295∗ ∗ ∗ 15.900 −0.290∗ ∗ ∗ −13.493
(5.025) (3.286) (3.377) (−3.315)
6 1.588∗ ∗ ∗ 93.601 0.796∗ ∗ ∗ 39.319 0.791∗ ∗ ∗ 39.023 0.206∗ ∗ 8.973
(6.956) (3.377) (8.294) (2.162)
7 1.450∗ ∗ ∗ 67.772 1.218∗ ∗ ∗ 54.461 0.232∗ ∗ 8.633 −0.353∗ ∗ ∗ −11.851
(5.666) (4.540) (2.329) (−3.546)
8 1.654∗ ∗ ∗ 67.569 1.424∗ ∗ ∗ 56.000 0.229∗ ∗ 7.430 −0.356∗ ∗ ∗ −10.520
C.-Y. Chang/The Financial Review 47 (2012) 697–718

(5.848) (4.998) (2.257) (−3.500)

9 1.859∗ ∗ ∗ 67.501 1.633∗ ∗ ∗ 57.330 0.226∗ ∗ 6.477 −0.359∗ ∗ ∗ −9.494
(6.075) (5.415) (2.096) (−3.331)
10 2.053∗ ∗ ∗ 66.963 1.845∗ ∗ ∗ 58.533 0.208∗ 5.327 −0.377∗ ∗ ∗ −9.005
(6.199) (5.855) (1.779) (−3.233)
20 3.642∗ ∗ ∗ 57.590 3.566∗ ∗ ∗ 56.102 0.076 0.955 −0.509∗ ∗ ∗ −6.165
(6.641) (7.028) (0.408) (−2.733)
∗∗∗ ∗∗ ∗
, , indicate statistical significance at the 0.01, 0.05 and 0.10 level, respectively.
 C.-Y. Chang/The Financial Review 47 (2012) 697–718 707

formed on day t–j for day t returns and can be observed from the coefficients of the
following regression:

Rit = c0j t + c1j t DWi,t−j + c2j t DLi,t−j + c3j t I Bi,t−j + c4j t I Si,t−j + eit , (2)

where DWi,t−j (DLi,t−j ) equals 1 if stock i’s past returns over the j-day period (t–j, t)
are in the top one-third. Note that I Bi,t−j (I Si,t−j ) is the buy (sell) imbalance dummy
that takes the value of 1 if the order imbalance measure for stock i is ranked in the
top (bottom) one-third for the period between day t–j and t, and eit is the residual
term. Individual coefficients are computed from separate cross-sectional regressions
for each j. The total return to j-day-horizon in day t of the  set of winner,
 loser, buy
imbalance, or sell imbalance can be expressed as sums J1 Jj=1 c1j t , J1 Jj=1 c2j t , . . .

, and J1 Jj=1 c4j t . Table 4 reports the time series averages of these day-by-day coef-
ficient estimates of these sums and the t-statistics (in parentheses) during the sample
period.
Our study interprets the coefficient estimate c1j t as day t return for a portfolio
that is long winners for price momentum measures, but hedges out all other effects
including long losers of price momentum measure, long highs of imbalance measure,
and long lows of order imbalance measure. The interpretations of estimates for
remaining coefficients, c2j t , c3j t , and c4j t are similar. The difference between c1j t
and c2j t shows the profits from a hedged portfolio that is long winners of price
momentum strategy and short losers of price momentum strategy. Analogically, the
difference between c3j t and c4j t shows profits from a hedged portfolio that is long
highs of order imbalance strategy and short lows of order imbalance strategy.
Table 4 shows the estimates from the regression models. The c3j t of all j-day-
horizon strategies are almost statistically significantly positive, while the c4j t of all
j-day-horizon strategies are nearly statistically significantly negative. Results appear
to show the coefficients of dummies from order imbalance strategies dominate those
from price momentum strategies.
The bottom two rows in Table 4 are F-tests to investigating whether the momen-
tum dummies add significant explanatory power to the order imbalance dummies. We
use the F-test for the comparison of nested models that are the two sets of estimates
in Equation (2). The first set of regression models includes imbalance dummies and
momentum dummy variables, whereas the second set of results comes from a re-
stricted model in which the momentum variables are omitted. The restricted version
of the model is a regression of y on order imbalance dummies alone.
Comparing the last two rows in Table 4, the proportions of rejecting the H0
(coefficients on the ROIB dummies are zero) are larger for one-, two-, and three-
day-horizon strategies compared to the momentum dummy variables that are zero.
Including information stock i’s order imbalance yields a significantly better ex-
planatory power than is obtained by using information about past returns alone. In
comparison, the remaining eight investment strategies, including the days of horizon
past three, reveal that the proportions to reject the H0 (coefficients on the momentum
708 C.-Y. Chang/The Financial Review 47 (2012) 697–718

Table 4
Comparison of daily price momentum and order imbalance strategies
Each day between July 1, 2006 and June 30, 2007 the j cross-sectional regression of the following
regression model was estimated for j-day-horizon strategies, j = 1, 2. . .10, and 20:
Rit = c0j t + c1j t DWi,t−j + c2j t DLi,t−j + c3j t I Bi,t−j + c4j t I Si,t−j + eit , (2)
where DWi,t−j (DLi,t−j ) equals 1 if stock i’s past return over the j day period (t–j, t) is in the top
one-third. Note that I Bi,t−j (I Si,t−j ) is the buy (sell) imbalance dummy that takes the value of 1 if the
order imbalance measure for stock i is ranked in the top (bottom) one-third for the period between day t–j
and t, and eit is the residual term. The coefficient estimates of a given independent variable were averaged
over j = 1, 2. . .10, and 20 for j-day-horizon strategies every day. Values report the time series averages of
these coefficient estimates. The t-statistics (in parentheses) are calculated from the time series. The F-tests
compare the above regression models and a restricted model in which the momentum variables or order
imbalance variables are omitted. The bottom two rows report the proportion of statistically significant
results to all regressions of specific j-day strategies. The t-statistic is based on Newey and West (1987);
covariance estimates are in parentheses.

j-day horizon
j=1 2 3 4 5
Intercept 0.098∗ 0.132∗∗∗ 0.151∗∗∗ 0.176∗∗∗ 0.179∗∗∗
(1.932) (2.740) (3.255) (3.806) (4.004)
DWi,t−j 0.052∗∗∗ 0.012 0.005 −0.017 −0.002
(2.616) (0.629) (0.232) (−0.838) (−0.104)
DLi,t−j −0.001 0.028∗ 0.027∗ 0.005 0.010
(−0.055) (1.709) (1.703) (0.311) (0.677)
I Bi,t−j 0.340∗∗∗ 0.225∗∗∗ 0.167∗∗∗ 0.128∗∗∗ 0.102∗∗∗
(15.628) (13.235) (11.401) (11.168) (9.465)
I Si,t−j −0.114∗∗∗ −0.085∗∗∗ −0.065∗∗∗ −0.054∗∗∗ −0.045∗∗∗
(−5.796) (−4.539) (−3.747) (−3.338) (−3.026)
The ratio of p-value 32.35% 34.39% 36.68% 38.19% 40.60%
less than 5% for
F-test (coefficients
on the momentum
dummies variables
are 0)
The ratio of p-value 54.20% 46.20% 39.55% 35.53% 32.74%
less than 5% for
F-test (coefficients
on the OIB
dummies are 0)
j-day horizon
j=6 7 8 9 10 20
Intercept 0.193∗∗∗ 0.207∗∗∗ 0.207∗∗∗ 0.216∗∗∗ 0.218∗∗∗ 0.223∗∗∗
(4.607) (5.208) (5.506) (5.950) (6.165) (7.295)
DWi,t−j −0.001 0.001 0.018∗ 0.022∗∗ 0.028∗ 0.017
(−0.071) (0.036) (1.100) (1.333) (1.666) (1.244)
DLi,t−j 0.008 −0.002 0.001 −0.009 −0.015 −0.014
(Continued)
 C.-Y. Chang/The Financial Review 47 (2012) 697–718 709

Table 4 (continued)
Comparison of daily price momentum and order imbalance strategies

j-day horizon
j=6 7 8 9 10 20
(0.558) (−0.114) (0.120) (−0.716) (−1.281) (−1.119)
I Bi,t−j 0.080∗∗∗ 0.066∗∗∗ 0.056∗∗∗ 0.045∗∗∗ 0.041∗∗∗ 0.016∗∗
(7.569) (6.455) (5.912) (5.145) (4.829) (2.460)
I Si,t−j −0.042∗∗∗ −0.042∗∗∗ −0.042∗∗∗ −0.042∗∗∗ −0.040∗∗∗ −0.040∗∗∗
(−2.998) (−3.168) (−3.390) (−3.463) (−3.428) (−4.608)
The ratio of p-value 38.91% 39.47% 39.23% 40.00% 40.40% 42.26%
less than 5% for
F-test (coefficients
on the momentum
dummies variables
are 0)
The ratio of p-value 32.55% 31.16% 30.47% 29.86% 29.47% 26.46%
less than 5% for
F-test (coefficients
on the OIB
dummies are 0)
∗∗∗ , ∗∗ , ∗ indicate statistical significance at the 0.01, 0.05 and 0.10 level, respectively.

dummies are zero) are larger than when the ROIB dummy variables are zero. These
results indicate that momentum dummies provide more information about stock re-
turns than does order imbalance alone for the strategies when the days of horizon are
more than three.
If we observe the trend of results from one to five-day-horizon strategies, we
see that the ratios of p-values less than 5%, when an F-test for the coefficients on
the momentum dummies variable are zero, are increasing if the days of strategy also
are increasing. The ratios range from 32.77% to 43.16%. However, the ratio declines
for six-day-horizon strategies (40.03%) and then steps up again. For comparison, the
ratios of p-values less than 5%, for F-tests of the coefficients on the ROIB dummy
variables are zero, and decay as the investment horizons lengthen.
In summary, the order imbalance dummies provide more information about
stock returns than momentum alone for the short investment time horizon. These
results are similar to Tables 2 and 3.
Table 5 examines the two-way momentum strategies’ returns. Stocks are first
grouped using the past returns measure (price momentum). Winners and losers within
the price momentum grouping are further classified using order imbalance. Buying
winner stocks from the higher one-third-order imbalance and selling loser stocks
from the lower one-third-order imbalance makes up the self-financing two-way port-
folios. The returns from winner-buy imbalance portfolios are all significantly positive,
even after transaction cost. Except for the one- and six-day-horizon strategies, the
loser-sell imbalance portfolios have positive returns, although smaller than
Table 5
Profits from two-way daily price-order-imbalance momentum strategies 710
This table reports the average daily and annualized portfolio returns from the Taiwan Stock Exchange (TSE) from July 1, 2006 through June 30, 2007 for
the two-way momentum. The stocks are first grouped using the past returns measure and then classified using order imbalance. The winner-buy (loser-sell)
imbalance portfolio is an equally weighted portfolio of 30% of winner (loser) stocks with the highest (lowest) past j-day accumulated order imbalances. The
winner (loser) portfolio is an equally weighted portfolio of 30% of stocks with the highest (lowest) past j-day accumulated return. The order imbalances of
individual stocks are calculated by summing all the orders from the intraday data to get the daily order imbalances data. The price-order-imbalance strategy is
constructed by purchasing (selling) the winner-buy imbalances (loser-sell imbalances) portfolios for holding j days. For comparison, the strategy profits without
and with transaction costs, including a transaction tax of 0.3% each sale and commission of 0.1425% for each trade, are reported. The t-statistic is based on
Newey and West (1987); covariance estimates are in parentheses.
Without transaction cost With transaction cost
Winner-buy Loser-sell Price-order- Price-order-
j-day imbalance Annualized imbalance Annualized imbalance Annualized imbalance Annualized
horizon (%) return(%) (%) return(%) (%) return(%) (%) return(%)
j=1 0.778∗ ∗ ∗ 593.826 −0.038 −9.151 0.816∗ ∗ ∗ 663.124 0.228∗ ∗ ∗ 76.660
(9.214) (−0.523) (13.565) (3.804)
2 1.047∗ ∗ ∗ 268.945 0.205 29.170 0.842∗ ∗ ∗ 185.935 0.254∗ ∗ ∗ 37.300
(7.430) (1.493) (9.731) (2.934)
3 1.276∗ ∗ ∗ 189.039 0.433∗ ∗ 43.388 0.844∗ ∗ ∗ 101.782 0.255∗ ∗ 23.679
(6.288) (2.318) (7.262) (2.198)
4 1.460∗ ∗ ∗ 148.574 0.646∗ ∗ ∗ 49.700 0.814∗ ∗ ∗ 66.185 0.225 15.104
(5.851) (2.735) (5.473) (1.517)
5 1.665∗ ∗ ∗ 129.556 0.869∗ ∗ ∗ 54.333 0.796∗ ∗ ∗ 48.843 0.208 10.942
(5.714) (3.190) (4.622) (1.209)
6 4.169∗ ∗ ∗ 464.640 −0.048 −1.994 4.217∗ ∗ ∗ 476.046 3.632∗ ∗ ∗ 352.155
(12.891) (−0.172) (19.781) (17.037)
7 2.086∗ ∗ ∗ 110.423 1.234∗ ∗ ∗ 55.343 0.852∗ ∗ ∗ 35.530 0.267 9.995
(6.161) (3.761) (3.823) (1.197)
C.-Y. Chang/The Financial Review 47 (2012) 697–718

8 2.386∗ ∗ ∗ 110.567 1.400∗ ∗ ∗ 54.816 0.987∗ ∗ ∗ 36.084 0.402∗ 13.365

(6.353) (3.999) (4.407) (1.794)
9 2.699∗ ∗ ∗ 111.380 1.588∗ ∗ ∗ 55.390 1.110∗ ∗ ∗ 36.106 0.525∗ ∗ 15.710
(6.632) (4.231) (4.477) (2.118)
10 3.080∗ ∗ ∗ 115.717 1.712∗ ∗ ∗ 53.375 1.368∗ ∗ ∗ 40.729 0.783∗ ∗ ∗ 21.600
(6.789) (4.402) (5.044) (2.886)
20 5.215∗ ∗ ∗ 91.746 3.575∗ ∗ ∗ 56.274 1.640∗ ∗ ∗ 22.743 1.055∗ ∗ 14.094
(7.023) (5.636) (3.701) (2.381)
∗∗∗ ∗∗ ∗
, , indicate statistical significance at the 0.01, 0.05 and 0.10 level, respectively.
 C.-Y. Chang/The Financial Review 47 (2012) 697–718 711

winner-buy imbalance portfolio returns. The loser-sell imbalance portfolios of one-

and six-day horizon show negative returns that are not significant. The price-order-
imbalance momentum strategies of the one- and six-day horizon earn the two largest
returns from winner and self-financing portfolios with transaction cost.
Compared with Tables 2 and 3, the returns of the winner-buy imbalance port-
folios of price-order-imbalance momentum strategies are larger in Table 5 than the
price momentum strategies in Tables 2 and 3 for all j-day-horizon strategies. The
profits of the loser-sell imbalance portfolios in Table 5 are smaller than losers in
Table 2 for all j-day-horizon strategies. The rise of price-order-imbalance momentum
returns in Table 5 is substantial (from negative to positive [0.228%] for one-day-
horizon strategies after transaction cost). This means order imbalance variables can
help momentum investors structure price momentum strategies when distinguishing
stronger winners and losers that have higher winner returns and lower loser returns
on average. The two-way measure ranked by the extremes of the distribution of order
imbalance and past returns is better at predicting future returns than a one-way price
momentum strategy.
Figure 1 depicts annualized returns of winner-buy imbalance, loser-sell imbal-
ance, and self-financing portfolios for price-order-imbalance momentum strategies.
The pattern of Figure 1 shows that the two largest returns come from strategies of
six- and one-day horizons.
Some strategy profits, such as the six-day-horizon strategy, are in fact very high
in Table 5. It is interesting to observe their standard graph of dynamics depicting
how the annual return per one unit increases over time. Considering the Taiwan stock
index as a benchmark, it appears as an upward trend, holding a return of 32.22% or
a dynamic return of 35.27% (the index ranges from 6,718.5 to 8,883.21 points) for
the sample period. We choose three two-way momentum strategies with annualized
returns that beat returns of the Taiwan stock index: one-, two-, and six-day-horizon
strategies. Figure 2 depicts the three dynamic returns per one unit length over time
after transaction cost. The one-, two-, and six-day-horizon strategies achieved a total
return of 68%, 34%, and 312% for the year, respectively, while they were 36%, 2%,
and 280% higher than the Taiwan stock index return.
Although the dynamic returns are very high, it is possible to miss such high
strategy returns due to the absence of liquidity when executing these strategies in
practice. Stocks with relatively high order imbalance ratios may be on nonarrival
of purchase and the stocks with relatively low order imbalance ratios may be on
nonarrival of sale for investors. However, our study still points out the contribution
of order imbalance to momentum profits.

3.3. Dominance of price-order-imbalance daily momentum strategy

We conducted nested comparisons of profits. If the price momentum is a good
predictor, profits should not be available through further investing criterion that di-
vide portfolios into subgroups. Results identify whether order imbalance has any
712 C.-Y. Chang/The Financial Review 47 (2012) 697–718

Figure 1
Annualized returns for price-order-imbalance momentum strategies
This figure plots the annualized portfolio returns from the Taiwan Stock Exchange (TSE) from July 1,
2006 through June 30, 2007 for the two-way momentum. The stocks are first grouped using the past returns
measure and then classified using order imbalance. The winner-buy (loser-sell) imbalance portfolio is an
equally weighted portfolio of 30% of winner (loser) stocks with the highest (lowest) past j-day accumulated
order imbalances. The winner (loser) portfolio is an equally weighted portfolio of 30% of stocks with the
highest (lowest) past j-day accumulated return. The order imbalances of individual stocks are calculated
by summing all the orders from the intraday data to get the daily order imbalances data. The strategy
is constructed by purchasing (selling) the winner-buy imbalances (loser-sell imbalances) portfolios for
holding j days. For comparison, the strategy profits without and with transaction costs, including a
transaction tax of 0.3% for each sale and commission of 0.1425% for each trade, are plotted.

explanatory power based on the rankings implied by the price momentum strat-
egy. Price momentum winner portfolios include stocks with past returns in the top
one-third, and loser portfolios include stocks with past returns in the bottom one-
third. The middle portfolios are the remaining one-third. The winner or loser stocks
are further subdivided into high, middle, and low groups using order imbalance
rankings.
Table 6 reveals that winner or loser stocks are not entirely populated by price
momentum winner or loser portfolios. When price momentum winner portfolios are
divided by order imbalance variables, returns are reduced for pairwise momentum
losers (from 0.318% in Table 2 to −0.020% in Table 6 for one-day-horizon strate-
gies), and returns are raised for pairwise momentum winners (from 0.318% in Table
2 to 0.778% in Table 6 for one-day-horizon strategies). This indicates there are
stronger individual-stock winners in price momentum winner portfolios whose order
 C.-Y. Chang/The Financial Review 47 (2012) 697–718 713

Figure 2
Dynamic return for price-order-imbalance momentum strategies with transaction cost
This figure plots standard graph of dynamic returns per one unit length over time from July 1, 2006 through
June 30, 2007. The Rm represents the Taiwan stock index. The one-, two-, and six-day horizon represents
the two-way momentum strategy after transaction cost. The two-way momentum strategy is constructed
by purchasing (selling) the winner-buy imbalances (loser-sell imbalances) portfolios for holding one, two,
and six days. The winner-buy (loser-sell) imbalance portfolio is an equally weighted portfolio of 30% of
winner (loser) stocks with the highest (lowest) past one-, two-, and six-day accumulated order imbalances.
The winner (loser) portfolio is an equally weighted portfolio of 30% of stocks with the highest (lowest)
past one-, two-, and six-day accumulated return. The strategy profits are after transaction costs, including
a transaction tax of 0.3% for each sale and commission of 0.1425% for each trade, are plotted.

imbalances are relatively high, while there are stronger losers in price momentum
winner portfolios whose order imbalances are relatively low. The high order imbal-
ances for winners have higher returns than low order imbalances for winners. There-
fore, the profits from buy-sell imbalance in winners are mostly positive (exception
for the five-day-horizon strategy after transaction cost). Again, the one- and six-
day-horizon strategies yield self-financing profits and their t-statistic results are the
largest. Among price momentum winners, the order imbalance strategy still maintains
profitability.
Observing the losers, we obtain different results. When price momentum loser
portfolios are divided by order imbalance variables, returns are reduced for sell
imbalance of the losers (from 0.121% in Table 2 to −0.038% in Table 6 for one-day-
horizon strategies), but the reduction in buy imbalance of the losers is substantial
(from 0.121% in Table 2 to −0.102% in Table 6 for one-day-horizon strategies). This
indicates that the high order imbalance stocks in losers have the lowest returns, while
the low order imbalance stocks in losers have the second lowest returns. The order
imbalance of some individual-stock winners in price momentum loser portfolios is
714 C.-Y. Chang/The Financial Review 47 (2012) 697–718

Table 6
Pairwise comparison of order-imbalance and price momentum
This table reports the average daily portfolio returns from the Taiwan Stock Exchange (TSE) from July 1,
2006 through June 30, 2007 for the pairwise comparison of order-imbalance and price momentum. First,
the winner (loser) portfolio is an equally weighted portfolio of 30% of stocks with the highest (lowest)
past j-day accumulated return. Then, the second classified portfolios are according to buy (sell) imbalance,
which is an equally weighted portfolio of 30% of winner or loser stocks with the highest (lowest) past j-day
accumulated order imbalances. The order imbalances of individual stocks are calculated by summing all
the orders from the intraday data to get the daily order imbalances data. The buy-sell-imbalance strategy
is constructed by purchasing (selling) the buy imbalances (sell imbalances) portfolios of winners or losers
for holding j days. For comparison, the strategy profits without and with transaction costs, including
a transaction tax of 0.3% for each sale and commission of 0.1425% for each trade, are reported. The
t-statistic is based on Newey and West (1987); covariance estimates are in parentheses.

Portfolio j-day horizon

by price Portfolio by
momentum order imbalance j=1 2 3 4 5
Winner Buy imbalance 0.778∗∗∗ 1.047∗∗∗ 1.276∗∗∗ 1.460∗∗∗ 1.665∗∗∗
(9.214) (7.430) (6.288) (5.851) (5.714)
Sell imbalance −0.020 0.046 0.162 0.292 1.265∗∗∗
(−0.342) (0.385) (0.923) (1.305) (4.493)
Buy-sell 0.806∗∗∗ 1.013∗∗∗ 1.127∗∗∗ 1.185∗∗∗ 0.400
imbalance (14.507) (11.976) (10.390) (9.292) (0.360)
Buy-sell 0.221∗∗∗ 0.428∗∗∗ 0.542∗∗∗ 0.600∗∗∗ −0.625∗∗∗
imbalance after (3.928) (5.009) (4.948) (4.663) (−5.606)
transaction cost
Loser Buy imbalance −0.102 0.031 0.172 0.341 0.531∗
(−1.281) (0.208) (0.859) (1.341) (1.757)
Sell imbalance −0.038 0.205 0.433∗∗ 0.646∗∗∗ 0.869∗∗∗
(−0.523) (1.493) (2.318) (2.735) (3.190)
Buy-sell −0.171∗∗∗ −0.317∗∗∗ −0.467∗∗∗ −0.459∗∗∗ −0.517∗∗∗
imbalance (−4.248) (−4.410) (−4.616) (−3.835) (−3.413)
Buy-sell −0.756∗∗∗ −0.902∗∗∗ −1.052∗∗∗ −1.044∗∗∗ −1.102∗∗∗
imbalance after (−18.854) (−12.545) (−10.398) (−8.718) (−7.278)
transaction cost
Portfolio Portfolio j-day horizon
by price by order
momentum imbalance j=6 7 8 9 10 20
Winner Buy imbalance 4.169∗∗∗ 2.086∗∗∗ 2.386∗∗∗ 2.699∗∗∗ 3.080∗∗∗ 5.215∗∗∗
(12.891) (6.161) (6.353) (6.632) (6.789) (7.023)
Sell imbalance 0.757∗∗∗ 1.064∗∗∗ 1.347∗∗∗ 1.681∗∗∗ 1.971∗∗∗ 3.930∗∗∗
(2.689) (3.190) (3.767) (4.220) (4.615) (5.638)
Buy-sell 3.460∗∗∗ 1.056∗∗∗ 1.078∗∗∗ 1.053∗∗∗ 1.134∗∗∗ 1.359∗∗∗
imbalance (16.091) (5.894) (5.585) (5.336) (5.566) (4.724)
Buy-sell 2.875∗∗∗ 0.471∗∗∗ 0.493∗∗ 0.468∗∗ 0.549∗∗∗ 0.774∗∗∗
imbalance after (13.370) (2.628) (2.554) (2.370) (2.696) (2.690)
transaction cost
(Continued)
 C.-Y. Chang/The Financial Review 47 (2012) 697–718 715

Table 6 (continued)
Pairwise comparison of order-imbalance and price momentum

Portfolio Portfolio j-day horizon

by price by order
momentum imbalance j=6 7 8 9 10 20
Loser Buy imbalance −0.480 0.967∗∗∗ 1.103∗∗∗ 1.221∗∗∗ 1.321∗∗∗ 2.755∗∗∗
(−1.518) (2.601) (2.764) (2.859) (3.096) (4.232)
Sell imbalance −0.048 1.234∗∗∗ 1.400∗∗∗ 1.588∗∗∗ 1.712∗∗∗ 3.575∗∗∗
(−0.172) (3.761) (3.999) (4.231) (4.402) (5.636)
Buy-sell −0.681∗∗∗ −0.517∗∗∗ −0.587∗∗∗ −0.641∗∗∗ −0.632∗∗∗ −0.979∗∗∗
imbalance (−4.187) (−2.841) (−2.767) (−2.883) (−2.941) (−2.912)
Buy-sell −1.266∗∗∗ −1.102∗∗∗ −1.172∗∗∗ −1.226∗∗∗ −1.217∗∗∗ −1.564∗∗∗
imbalance after (−7.831) (−6.075) (−5.544) (−5.528) (−5.675) (−4.653)
transaction cost
∗∗∗ , ∗∗ , ∗ indicate statistical significance at the 0.01, 0.05 and 0.10 level, respectively.

located in the median range. In other words, the high order imbalances among losers
have lower returns than low order imbalances for losers. Therefore, the profits from
a self-financing strategy based on order imbalance produces negative returns among
stocks that have already been classified by past returns as losers.
This result suggests that sorting on order imbalance for loser stocks does not
provide clear results. One possible reason is market depth, which is defined as the
number of orders waiting to be executed at different prices as in the limit order
book. Depth could represent liquidity, and the depth or liquidity differs for winners
and losers. Similarly, Chordia, Roll and Subrahmanyam (2001) find when market
returns are negative, depth declines. Pastor and Stambaugh (2003) argue for the
cross-sectional negative return-liquidity relationship.
For losers, the orders waiting to trade, when there are more selling orders than
buying orders in the market, may suffer a decline in depth or liquidity. In a shallow
market, a larger price impact accrues to the same trading volume than in a deep
market. Although the buying order is relatively less for losers with a low order
imbalance ratio, the low depth makes the subsequent price response large. Because
the price, during the sample period of this study, moved upward, the winners, and
even the losers, exhibit upward price trends. When the market price is upward, we
observe that losers with a low order imbalance ratio have subsequently larger price
rises, while losers with a high order imbalance ratio experience subsequently smaller
price rises. However, this is not what we observe for the winners. The winners in our
results experience active trading. Therefore, the winners with low order imbalance
ratio may not suffer a serious liquidity problem and the order imbalance ratio may
yield strategy profits.
Although the results for price momentum losers are not intuitive (see Table 6),
they are not in conflict with Table 5. Observations reveal that the returns of low
order imbalance stocks for price momentum losers are lower than the returns of
high order imbalance stocks for price momentum winners (e.g., −0.038% < 0.778%
716 C.-Y. Chang/The Financial Review 47 (2012) 697–718

Figure 3
Annualized returns of price momentum winners/losers with portfolios made from order imbalances
This figure plots the annualized portfolio returns from the Taiwan Stock Exchange (TSE) from July 1,
2006 through June 30, 2007 for the two-way momentum. First, the winner/loser portfolio is an equally
weighted portfolio of 30% of stocks with the highest/lowest past j-day accumulated return. Then, the
second classified portfolios are according to buy (sell) imbalance, which is an equally weighted portfolio
of 30% of winner or loser stocks with the highest (lowest) past j-day accumulated order imbalances. The
order imbalances of individual stocks are calculated by summing all the orders from the intraday data to
get the daily order imbalances data. The strategy is constructed by purchasing (selling) the buy imbalances
(sell imbalances) portfolios of winners/losers for holding j days. For comparison, the strategy profits
without and with transaction costs, including a transaction tax of 0.3% for each sale and commission of
0.1425% for each trade, are plotted.

in one-day-horizon strategies, 1.047% < 0.205% in two-day-horizon strategies) in

Table 6.
On the basis of Table 6, Figure 3 shows the annualized returns of price momen-
tum winners/losers with portfolios made up of order imbalances. All the self-financing
annualized returns of price momentum winners are positive without transaction cost
and only the five-day-horizon strategy is negative after transaction costs. Without
transaction costs, the highest annualized price momentum winners, with buy-sell
imbalances, are one-day-horizon strategies. The second highest annualized returns
from self-financing strategies for winners, with order imbalances, are six-day-horizon
 C.-Y. Chang/The Financial Review 47 (2012) 697–718 717

strategies. Considering the transaction costs, the profits of six-day-horizon strategies

are the highest.
Considering transaction costs, the lowest annualized price momentum losers
with buy-sell imbalances are one-day-horizon strategies. All the self-financing annu-
alized returns of price momentum losers are negative.
Results show the importance of information about order imbalance. An expla-
nation for this importance is that investors exhibit an eagerness to trade an individual
stock that might affect continuation of past returns.
Finally, although not reported in the article, White’s Reality Check is obtained
by applying testing procedures only to the best rule while ignoring the effect of data
snooping. Our study considers zero mean profits as the benchmark strategy. The best
strategy is better than the zero mean profits in terms of the mean return, and the
best-performing strategies produce significant mean returns.

4. Conclusion
Our study discusses the daily momentum of the Taiwan stock market, a market
in which individual investors make up the largest proportion of investors. This is in
contrast to the stock markets of other developed countries. We chose to focus on
the Taiwan stock market with its order-driven mechanism because the data directly
indicates whether a trade is buyer-initiated or seller-initiated.
Results from the two-way momentum strategies, the nested comparisons, and
the regressions indicate that the order imbalance variable is a good predictor of future
returns and helps strengthen profits of price momentum strategies. Empirical evidence
suggests that price-order-imbalance momentum strategies are more profitable than
price momentum strategies. This implies that order imbalance is an important clue
for investors. To evaluate whether strategies generate a mean strategy profit superior
to that of a benchmark strategy, our study applies the White’s Reality Check and finds
that order imbalance does indeed produce profits superior to zero mean profits. The
convenience of obtaining order imbalance information may lead to a continuation of
past returns due to investors’ eagerness to complete their past unfilled and unsatisfied
investing orders.

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