The Effects of Order Flow Imbalance on Stock Prices in Tehran Stock Exchange

Document Type : Original Article

Authors

1 Associate Prof., Institute for Management and Planning studies, Tehran, Iran

2 Ph.D. Candidate in Economics, University of Toronto, Toronto, Canada

Abstract

We investigate the impacts of the order book events on the prices of the 30 largest stocks in the Tehran Stock Exchange in the year 2020. The purpose of this article is to measure the price sensitivity to changes in supply and demand volumes and identify the factors affecting this sensitivity. Similar to the method proposed by Cont et al. (2014), by performing about thirty thousands of OLS regressions, we show that in a low-depth market, the mid-price returns are explained significantly by the order flow imbalance that represents the net change in demand, namely the difference between the volumes of events on two sides of the order book [7]. We also show that the use of the Order Flow Imbalance in the first three levels of the order book can increase the explanatory power of the model for stock mid-price changes, indicating that higher levels of the order book also affect stock price changes significantly. Moreover, the results confirm that the market depth has a negative effect on the power of events to move the stock price. In addition, we show that our results are robust to changes in months or stocks.

Keywords

References

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Financial Management Perspective
Volume 12, Issue 40
February 2023
Pages 9-27

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