Order Imbalance Indicators in Asset Pricing: Evidence from the Warsaw Stock Exchange

The paper is devoted to the description of rates of return for stocks listed on the Warsaw Stock Exchange (WSE) basing on the information of order imbalance. The model employed in the research is a modified version of Fama and French (J Financ Econ 33(1):3–56, 1993) asset pricing model including additionally the ‘order imbalance factor’ built on the basis of the original imbalance indicators proposed by Nowak (Order imbalance on the Warsaw Stock Exchange, 2000–2012. Paper presented at the International Conference Financial Investments and Insurance – Global Trends and Polish Market, Wrocław University of Economics, Wrocław, 17–19 September 2014). The order imbalance is assumed as the temporary imbalance between buy and sell orders. Its estimation is preceded by an indication which side of the market was initiating the transaction, and a distinction between the so-called buyer- and seller-initiated trades [Lee and Ready (J Financ 46(2):73–746, 1991), Ellis, Michaely and O'Hara (J Financ Quant Anal 35(4):529–551, 2000)]. The imbalance indicators are calculated using the high frequency intraday data. The research hypothesis states that the proposed asset pricing model has good descriptive properties. The analysis is conducted for the selected stocks—index WIG20 constituents listed on the WSE over the period of 2000 to 2016. The model is validated using i.a. the underidentification test and the weak identification test [Kleibergen and Paap (J Econom 133(1):97–126, 2006)], overidentification test of all instruments [Hansen (Econometrica 50(4):1029–1054, 1982)] and endogeneity test of endogenous regressors.