Order Imbalances and Market Efficiency: Evidence from a Pure Order-Driven Market

Abstract

Using a sample of 196 stocks, this study investigates the intraday market efficiency of the National Stock Exchange of India (NSE), a market that is entirely order-driven. The return autocorrelation and variance ratio tests suggest that the hourly returns of stocks at NSE are not serially correlated. Hourly order imbalances (OIBs) are highly persistent up to four lags, and can help in return prediction. Investors appear to follow short-horizon OIBs to conduct counter-vailing trades, and remove serial dependence in short-term returns. A simple order imbalance based trading strategy appears to offer abnormal returns; however, these returns vanish once the trading costs are factored in. Overall, the results indicate that the de-facto market making at NSE is effective.