The Relation Between Relative Order Imbalance and Intraday Futures Returns: An Application of the Quantile Regression Model

to Taiwan
Chiao Yi Chang and Fu Shuen Shie
ABSTRACT: Adopting the quantile regression model, this paper describes the positive relation between relative order imbalance and intraday futures returns. The positive connection is relatively stronger for lower quantiles of intraday futures returns than for higher quantiles. However, the connection vanishes within 30 minutes. The results reect the compensation of the uncertainty and the absence of liquidity for relatively lower returns in the Taiwan futures market. Furthermore, this paper nds evidence supporting an Lshaped pattern for intraday futures returns. KEYWORDS: intraday data, order imbalance, quantile regression model.

Figlewski (1982) argued that heterogeneous information causes information diversity among investors, which affects the markets in which investors participate. In the orderdriven market, because there is no centralized market maker; prices are determined by the interactions of buyers and sellers, who are free to choose between limit and market orders. Such orders measure trading activity and the intensity and strength of trading directions intuitively. As such, an order imbalance exists due to the opposing views of the buyers and sellers in regard to the same nancial assets. The order imbalance, representing the unsatised orders, arises due to the frictions associated with the costs of waiting, because investors may need to pay higher buying prices or lower selling prices for immediate trades. Because relative order imbalances (ROIBs) display positive or negative signs reecting their directions, they offer more information relating to market activity than volume alone. Many of the previous papers investigating the relation between order imbalance and the returns of nancial assets are conned to stock markets (as evidenced by the empirical results for the New York Stock Exchange (NYSE) in McInish and Wood 1990 and Chordia and Subrahmanyam 2004; for the NASDAQ in Chan et al. 1995; and for 835 stocks on the London Stock Exchange in Abhyankar et al. 2003). In relation to other stock markets, relatively fewer empirical results have been conducted on futures markets in which a linkage is found to exist between order imbalance and futures returns. Although prices in the spot and futures markets are highly correlated, there are differences in intraday returns due to the different types of investors and market microstructures. In

Chiao Yi Chang (cyc@ntit.edu.tw) is an assistant professor in the Department of Insurance and Finance at National Taichung Institute of Technology, Taiwan. Fu Shuen Shie (fsshie@ntit.edu.tw) is an assistant professor in the Department of Finance at National Taichung Institute of Technology, Taiwan. The authors thank the anonymous referees for providing valuable feedback and many insightful comments in support of this study. They also thank Ali Kutan, the editor, for numerous helpful suggestions.
Emerging Markets Finance & Trade / MayJune 2011, Vol. 47, No. 3, pp. 6987. Copyright 2011 M.E. Sharpe, Inc. All rights reserved. 1540-496X/2011 $9.50 + 0.00. DOI 10.2753/REE1540-496X470304

70 Emerging Markets Finance & Trade

contrast to the spot market, investors in futures markets are motivated primarily by hedging or speculation. In addition, because the underlying asset of index futures is a basket of stocks rather than an individual stock, information that is private or rm specic has little effect on the whole basket of stocks (Gorton and Pennacchi 1993). International investors often consider the emerging market a form of risk diversication in their portfolios. However, the nancial markets of emerging countries are characterized by high volatility, with asset prices that are more volatile relative to those in developed countries. In particular, futures contracts transactions are implemented using margins to create leverage, which carries with it a high degree of risk. Thus, the behavior of the futures market in emerging markets is worthy of investigation. The relatively higher or lower returns experienced in emerging markets occur in relation to both risk and the absence of liquidity. Amihud and Mendelson (1986) found support for the liquidity premium hypothesis, which states that investors require a premium when there is an absence of liquidity. The liquidity problem increases in severity when there are lower asset prices or returns. The quantile regression model can assist in understanding the behavior of the futures market under an entire conditional distribution of futures returns, thus incorporating the results under the conditions of relatively higher or lower futures returns. Therefore, with the intention of better understanding the connection between order imbalance and index futures returns, this paper employs the quantile regression model to examine the relation under the conditions of relatively higher or lower futures returns. This paper adopts the intraday data in the Taiwan Futures Exchange (TAIFEX) with an order-driven mechanism because the unique intraday data of orders from buyers or sellers can be identied directly and the positive or negative signs of orders are available. As such, we need not identify seller-initiated or buyer-initiated trades using Lee and Readys (1991) approach or other similar approaches. The seller-initiated or buyerinitiated trades are ex post, whereas the buyer or seller orders are ex ante, to represent the respective needs of investors. In addition, due to the absence of index futures markets in some emerging markets, this paper provides a sample case study as a reference for other emerging countries in similar situations. The results of this paper show that a higher ROIB (i.e., excess demand) results in higher futures returns in the time series and vice versa. In particular, this phenomenon is more signicant in the case of relatively lower futures returns because lower futures returns reect a more serious liquidity problem. The connection vanishes within a period of 30 minutes. Because investors can inquire about the accumulated unexecuted buy or sell orders through the futures price terminal, which is released by TAIFEX every 5 seconds during the trading session, protable trading strategies may result from using the intraday order imbalance. When traders observe excess demand or supply, they can submit orders during an interval of about 30 minutes. Another aim of our research is to report the pattern of intraday futures returns in the TAIFEX. We found that an Lshaped pattern exists for intraday futures returns. It is possible that high futures returns result from opening trade due to the overnight halt in trade and the accumulated effect of information released. Lack of high returns at the close of trading in Taiwanese futures markets suggests that informed traders with private information prefer not to trade during the closing stages of the market. Because the largest proportion of investors in Taiwan comprises individuals, it is suggested that there are fewer informed traders in the market.

MayJune 2011 71

Literature Review The buy and sell orders, which normally provide an important information source for the market maker in the quote-driven market, are crucial for market participants in the order-driven market. The buy and sell orders represent the collective views of the buyers and sellers and reect their interpretation of the information and imbalances representing the pricing conicts between both types of traders. Thus, the order imbalances can directly represent the excess market demand. Excess demand or supply exists when the numbers of buy orders and sell orders do not match. Order imbalances with positive or negative signs represent the excess demand or excess supply, respectively. Different combinations of buy and sell orders lead to different implications in the same set of transactions. Therefore, the order imbalances are more useful information for investors because volume is reected in the activities from the directions of buying or selling orders. Chan and Fong (2000) pointed out that order imbalance is an important trading variable because the volatilityvolume relation becomes much weaker after controlling for the impacts of order imbalance in NYSE and the NASDAQ. Regarding the order-driven spot market, Brown et al. (1997) conrmed the presence of such an order-imbalance return relation in the Australian stock market. Liu (1997) demonstrated that order imbalances play an inuential role in the Taiwanese stock market. Lee et al. (2004) supported the persistence in the daily order imbalance and the positive relation between contemporaneous stock returns and the order imbalance in Taiwan. Bailey et al. (2009) documented the strong positive contemporaneous relationship between daily order imbalances and individual stock returns in China. Almost the entire automated system of futures markets is order driven. However, Westerholm and Swan (2004) indicated that the existence of a market-making system could assist the reduction of price volatility and transaction costs more effectively than under a purely order-driven system. Jain (2003) pointed out that market makers can improve liquidity. In the emerging futures market, their volatility is relatively high, whereas liquidity is relatively low. Therefore, the emerging futures market, which has adopted an order-driven mechanism without the intervention of market makers, is worthy of discussion. In developed futures markets, Ning and Tse (2009) documented that neither a contemporaneous nor a lagged positive daily order imbalance exhibited effects on futures returns for FTSE 100 index futures contracts in the order-driven market. Other studies have also investigated the relation between order imbalance and futures returns in emerging futures markets. Huang and Chou (2007) investigated Taiwan stock index futures and found that contemporaneous and lagged order imbalance has a positive signicant impact on futures returns over 5minute intervals.1 Owing to the higher volatility and lower trading volume of emerging markets in Taiwan as opposed to developed countries, investors might pay a higher premium to trade in the event of excess demand or supply. Price pressures caused by the order imbalance result in a positive relation between lagged order imbalances and futures returns, especially for relatively higher or lower returns. Because investors are afraid to leave their orders unfullled and are eager to trade under extreme returns, we expect the relation between order imbalance and futures returns under higher or lower futures returns to be stronger. However, there is absence of literature on this issue. Another interesting issue is the intraday pattern. Many studies point to the evidence of high returns, trading volume, and volatility at both the opening and closing of the market. Past studies have often focused on the Ushaped pattern of the variation in stock returns (McInish and Wood 1990; Wood et al. 1985), and other papers have also mentioned the

72 Emerging Markets Finance & Trade

Ushaped pattern of stock returns (Jain and Joh 1988; Lockwood and Linn 1990; Tian and Guo 2007). The reasons for such a pattern include the mechanism of the periodic call supported by Amihud and Mendelson (1987); the strategic trading model in which trade is concentrated in a particular period during the day, as supported by Admati and Peiderer (1988); and delays resulting from the market closing that lead to information uncertainty, with traders facing excessive risk, as argued by Slezak (1994) regarding spot markets. Regarding futures markets, Daigler (1997) found that trading activity and volatility follow a Ushaped pattern in Major Market Index, S&P 500, and Tbond futures contracts. Ding (1999) found support for similar results for foreign exchange futures markets, and Tang and Lui (2002) also found similar results in China. Although most studies often mentioned the Ushaped pattern, some special patterns are also found in the empirical results, such as a Wshaped return pattern corresponding to the Tokyo Stock Exchanges two trading sessions (Chang et al. 1993) and the Istanbul Stock Exchange in Turkey (Bildik 2001). This paper also observes the intraday pattern in Taiwan and nds evidence of an Lshaped pattern of futures returns, as well as a Ushaped pattern for the ROIB. Measures of Variables and the Empirical Model This paper employs the quantile regression model supported by Koenker and Bassett (1978). The quantile regression model estimates the models for the median and other conditional quantile functions. Thus, the entire range of quantiles is observable, aiding further understanding of the connections between the independent and dependent variables. If x , t1 is a set of independent variables, it will be represented as follows: Rt=x t1+t where is the coefcient vector. We can then measure the coefcients by the quantile regression model through minimizing the value of Equation (1) as follows: min

The conditional th quantile functions as depicted by Equation (1) are estimated by minimizing an asymmetrically weighted sum of absolute errors. We construct the regression model as follows: Rt = b0 + b1ROIBt1 + et. (2)

1 Rt xt1 + (1 ) Rt xt1 . T t :Rt < xt 1 t :Rt xt 1

(1)

In this model, Rt is the dependent variable representing the intraday futures returns for each 5-, 15-, and 30-minute interval. The relative order imbalance, ROIBt, is dened as the proportion of order sizes at time t: ROIBt =
i =1

NBi,t NSi,t
i =1

i =1 The subscript t denotes the time interval t for each 5-, 15-, and 30-minute interval. The subscript i is the frequency of orders from buyers or sellers. NB and NS denote the order sizes of futures contracts bought and sold, respectively. VOL is the trading volume in futures contracts. Using the trading volume as the denominator to eliminate the size problem, the relative order imbalances eliminate the size distortion present in the order imbalances themselves, which follows increases in trading volume.

VOLi,t

(3)

MayJune 2011 73

After conrming the base connection between the intraday futures returns and ROIB, we considered several important control variables in our model. Past literature has argued that liquidity is a primary driving factor of the execution costs in stock index futures (Berkman et al. 2005; Tse et al. 2006). To measure liquidity, we calculated the absolute value of futures returns associated with the number of trades, TradeNt, at each 5-, 15-, and 30-minute interval. LIQUIt is dened as follows: (4) A higher number for LIQUIt implies greater market liquidity. In addition, we used two other measures of liquidity. The numerator of the rst alternative measure is replaced by the summation of the change of futures price for every trade j over 5-, 15-, and 30minute intervals, being Sj|DPjt|/TradeNt. The other measure of liquidity is the squared futures returns divided by volume for each time interval, being Rt2/VOLt. These measures have also been used in several empirical studies (Chang et al. 1999; Lehmann and Modest 1994). Chordia et al. (2002) argued that order imbalances are signicantly associated with daily changes in liquidity, after controlling for volume. The trading volume variable, VOLt, is also added as a control variable in this paper. We consider that the volatility can thus help improve predictive power (Andersen et al. 1999; Huang and Stoll 1994). Finally, the variable of intraday time intervals for each day provides controls for the intraday variation (Ahn et al. 2001; Goh and Kok 2006). The model is represented as follows: TradeN t (5) m =1 k =1 where TIMEk,t represents the kth time-of-day dummy variable, which takes the value of one if the futures returns for time t corresponding with the time interval k, and zero otherwise. There are 59, 19, and 9 time-of-day dummy variables in Equation(5) for 5, 15, and 30 minutes of trading time, respectively. The volatility variable, VFt, represents the conditional intraday return volatility and is built using a GARCH(1,1) model (Laurini et al. 2008). Given that the dynamic model and order imbalance is autocorrelated (Chordia and Subrahmanyam 2004; Ning and Tse 2009), we extend the specication of Equations(2) and(5) to include the lag, limited to 12 lagged-order imbalance terms. To determine the best model, we employ Akaikes information criterion (AIC) and the Schwarz Bayesian criterion (SBC), whereby the lagged-order model with the smallest AIC and SBC among all the competing models is the best model. Data and Empirical Findings Data We selected the Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX) futures (TX) traded on TAIFEX to serve as our representative futures market. Taiwanese data allow direct identication of whether a trade is initiated by the buyer or the seller. The data set allows us to identify the originator of each order as it is submitted by a seller or a buyer. Although the buyer or seller orders submitted to the exchange might not be matched, the original orders can still reveal the price pressures from investor intuition. The orders are executed under a price and time priority system.2 Rt = 0 + LIQUI t = Rt .

m ROIBt m + k TIMEk ,t + 1LIQUI t + 2VOLt + 3VFt + t ,

74 Emerging Markets Finance & Trade

The TAIEX futures contract is the most actively traded index futures contract on the TAIFEX. Given that the nearby futures contracts are usually the most actively traded contracts, we utilized data for these contracts. The data were also adjusted by rolling over to the next nearest-to-deliver contract on the 5 days prior to expiry in order to create a time series of futures returns, thereby avoiding thin markets and expiration effects. Chou, Chen, and Chen (2006) found that the expiration effect is stronger in Taiwan than in Hong Kong, although weaker than in the United States. The sample period extended from October1, 2006, to September30, 2007, with a total of 3,338,242 orders being spread over 245 trading days. The trading day is divided into 5-, 15-, and 30minute intervals from the markets opening to its closing. There are 14,945, 5,145, and 2,695 observations from the 5-, 15-, and 30-minute intervals, respectively. The TAIFEX is traded in a computer-based continuous orderdriven trading system to improve liquidity. The Taiwan futures market changed the price formation process from call auction to continuous auction. Comparing the two trading mechanisms, Cheng and Kang (2007) supported the conclusion that the continuous auction improves information efciency. The TAIFEX futures contracts are traded from 8:45 A.M. to 1:45 P.M. on each trading day, and orders that accumulate in the 15 minutes before opening and the 5minutes before closing must be matched by a call auction. The electronic trading system matches the orders in the form of a continuous auction from 8:45 A.M. to 1:40P.M. The main difference between trading rules in the spot and futures markets in Taiwan is that the stock exchange operates under a call auction system that retains the orders periodically and matches the transactions every 2535 seconds in a trading section, whereas the futures exchange employs continuous auction. However, at the market opening and closing, both exchanges are traded by a call auction. Empirical Findings Table 1 presents descriptive statistics for the Taiwan index futures.3 The average for ROIB decreased as the time interval increased. The relevant numbers ranged from 1.23104 for 5minute intervals to 0.42 104 for 30minute intervals, and the standard deviation was found to be decreasing. This supports the view that strategic traders concentrate their trading activities within a given period of time, as suggested by Admati and Peiderer (1988). The relation between the ROIB and futures returns was examined using the quantile regression model, with the results presented in Table2. The coefcients and tstatistics in relation to ROIB are reported for the quantiles at each 5 percent interval. The quantile regression coefcients can be interpreted as the marginal change in futures returns for the th conditional quantile as a result of the marginal change in the relative order imbalance. In Table2, the coefcients for the median quantiles (i.e., those from the 25 percent quantile to the 70 percent quantile) were found not to be signicantly different from zero. Their effects on the futures returns were not obvious where the power of both the buyers and sellers were about the same. For both extremes of the quantiles, which imply relatively higher or lower intraday futures returns, the effects of order imbalance contributed more to the intraday futures returns than the median quantiles of the intraday futures returns. Where the intraday futures returns were lower, the coefcients increased from 26.5106 for the 20 percent quantile to 120106 for the 5 percent quantile. In contrast, where the intraday futures returns were higher, the coefcients only increased from 11.6 106 in the 75 percent quantile to 43.2106 in the 95 percent quantile.

Table 1. Descriptive statistics for the Taiwan stock index futures market
Price
0.0126 0.0135 4.1344 3.1720 0.3543 0.1065 26.0601 2,694 3,652.3280 3,154.5000 23,471.0000 182.0000 2,338.3000 1.8309 10.0020 2,694 0.0066 0.0124 4.1344 3.1720 0.2564 0.2508 46.5951 5,144 1,913.0260 1,587.0000 14,785.0000 1,587.0000 1,285.6390 1.9825 10.5954 5,144 1,909.4610 1,608.0000 14,001.0000 1,665.0000 1,305.7290 1.8912 9.9027 5,144 3,645.6100 3,130.0000 22,398.0000 1,027.0000 2,362.8440 1.7805 9.3039 2,694 0.0023 0.0000 4.1344 3.1720 0.1509 0.1514 126.3244 14,944 658.5846 535.0000 6,824.0000 2,298.0000 529.6382 1.9451 10.4661 14,944 657.2968 536.0000 6,002.0000 2,142.0000 556.0252 1.6916 9.1311 14,944

Descriptive statistics Return NB NS

ROIBa
1.2303 0.0743 1,104.0000 1,820.0000 134.6455 0.2024 12.8448 14,944 0.4171 0.1109 987.0000 459.0000 51.6892 2.1902 54.8887 5,144 0.4178 0.0621 987.0000 459.0000 41.6016 8.0040 216.8669 2,694

8,078.7880 7,947.0000 9,821.0000 6,859.0000 692.7987 0.4232 2.3413 14,945

5 minutes Mean Median Maximum Minimum Standard deviation Skewness Kurtosis Observations 15 minutes Mean Median Maximum Minimum Standard deviation Skewness Kurtosis Observations 30 minutes Mean Median Maximum Minimum Standard deviation Skewness Kurtosis Observations

8,078.7100 7,947.0000 9,821.0000 6,861.0000 692.7426 0.4230 2.3410 5,145

8,078.4600 7,947.0000 9,790.0000 6,867.0000 692.7055 0.4223 2.3387 2,695

MayJune 2011 75

Notes: The sample covers intraday observations for the October 1, 2006, to September 30, 2007, period. NB=the order sizes of futures contracts bought, NS=the order sizes of futures contracts sold, ROIB=the ratio or net order sizes of futures contracts bought to the trading volume. a 104.

Table 2. Coefcient estimations of the quantile regression model

Restriction value
0.455 1.103 2.629*** 2.574** 3.574*** 3.926*** 3.798*** 16.409*** 26.691*** 7.026*** 4.719*** 5.153*** 4.398*** 2.572** 1.924* 1.182 0.357 0.046 c2 61.15***

76 Emerging Markets Finance & Trade

Quantile regression result Symmetric quantiles test Quantile Coefcient t-value Quantile Coefcient t-value

Intercept 0.05 0.169 49.989*** 0.95 0.167 52.084*** 0.10 0.111 56.515*** 0.90 0.114 68.973*** 0.15 0.083 64.714*** 0.85 0.088 69.199*** 0.20 0.064 56.673*** 0.80 0.068 64.648*** 0.25 0.049 50.622*** 0.75 0.054 56.593*** 0.30 0.037 40.902*** 0.70 0.041 46.767*** 0.35 0.025 29.622*** 0.65 0.029 35.699*** 0.40 0.013 16.317*** 0.60 0.024 32.063*** 0.45 1.735a 0.002b 0.55 0.013 17.171*** 0.50 0.002a 0.068b ROIBt1 0.05 120.008c 5.825*** 0.95 43.185c 3.740*** 0.10 57.200c 3.468*** 0.90 35.302c 2.808*** 0.15 36.773c 4.328*** 0.85 20.422c 2.551** 0.20 26.461c 3.133*** 0.80 18.817c 2.370** 0.25 9.872c 1.390 0.75 11.562c 1.682* 0.30 6.815c 1.059 0.70 6.789c 1.074 0.35 1.351c 0.223 0.65 5.478c 1.043 0.40 0.946c 0.163 0.60 0.715c 0.140 0.45 0.001a 20.740a 0.55 0.149c 0.028 0.50 0.004a 0.007 Slope equality test

Goodness-of-t statistics Adjusted R2 (percent) Quantile

0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.887 0.581 0.413 0.357 0.157 0.061 < 0.01 < 0.01 < 0.01

Quantile

Adjusted R2 (percent)

< < < <

0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

3.539 1.546 1.224 0.457 0.128 0.060 0.01 0.01 0.01 0.01

Notes: For each 5-minute observation between October 1, 2006, and September 30, 2007, quantile regression of the following form is estimated: Rt = b0 + b1 ROIBt1 + et,

where Rt is the return of Taiwan stock index futures; ROIB is the relative order imbalance. a, b, and c mean to multiply 1018, 1012, and 106, respectively. ***1percent signicance level; ** 5 percent signicance level; * 10 percent signicance level.

MayJune 2011 77

78 Emerging Markets Finance & Trade

Linton and Whang (2007) employed a quantile autoregression process and argued that the predictability in daily stock index returns at the median is of comparable strength to the returns around the mean and is strongest at the lower tails (i.e., 5percent to 10 percent). Our results found stronger impacts in the lower (<25 percent) or higher (>70 percent) quantiles, especially at the lower tails. The lower quantiles tended to respond to ROIBs more sensitively than did the higher quantiles. The symmetric quantiles test was used to determine whether the coefcients of the pairwise quantiles regressions were equal, such as (0.05,0.95) and (0.1,0.9), in order to observe the effects of the relative order imbalances on futures returns (Newey and Powell 1987). For the estimated coefcients of ROIBt1 in Table2, there is strong evidence of departures from symmetry for both extremes of the quantiles. The ndings reject the null hypothesis that the results under pairwise quantiles are the same below the 30 percent and 70 percent quantiles. The slope equality test proposed by Bassett and Koenker (1982) was also examined and supports the results. The null hypothesis of homoskedasticity is thus rejected, implying that the slope coefcients are not constant across the quantiles. The response of the futures market to negative information (higher amounts of new sell orders) is stronger in magnitude and more persistent than in the case of positive information (higher amounts of buy orders). One possible reason is that investors want liquidity, especially for higher numbers of sell orders. The results can be explained by the liquidity premium hypothesis proposed by Amihud and Mendelson (1986), as investors require a premium for the absence of liquidity where there are lower futures returns. Similarly, using the daily data for the FTSE100 Index futures contract, Ning and Tse (2009) found that only excess sell orders generate an associated price impact, whereas buy orders do not produce the same effects. We can thus expect that the more excess sell orders, the lower the futures returns, with the coefcients on the lower quantiles having an associated impact on futures returns. In addition, the effect vanishes after about half an hour under the conditions of a relatively higher number of sell orders, and it disappears within about 5 minutes where there are relatively more buy orders. The result is similar to that found by Chordia et al. (2005), with the lagged order imbalances having a signicant impact on returns up to the 30minute interval. In sum, the effect is rapid and immediate. 2 The forecasting model has explanatory power with an adjusted R of 3.54 percent at the 5 percent quantile in the quantile regression and 0.48 percent on the regression model 2 is not high, it is similar to that recorded in Table2. Although the value of the adjusted R 2 in other research papers. Ning and Tse (2009) reported that their adjusted R was 0.9 percent in the regression model for the returns on daily order imbalances. We demonstrate the estimates and the 95 percent condence intervals of 1 for the 5minute intervals in Figure1. The horizontal axis represents the quantiles, and the vertical axis represents the coefcients of 1. The Ushaped pattern is as shown in Figure 1, and the left of the line is higher than the right of the line, as described earlier. Figure 1 depicts the advantages of the quantile regression. The two sets of coefcients under the extreme conditions of the ROIB are different from the coefcients for the median of the ROIB. As this point, the conventional regression cannot be observed. In addition, those coefcients are likely to provide additional information about the behavior of the dependent variable with respect to the explanatory variable, beyond the information conveyed by the OLS slope estimates.

MayJune 2011 79

Figure 1. Coefcient estimations of the quantile regression, conventional OLS method, and the relevant 95 percent condence intervals for each 5-minute period for the Taiwan stock index futures market
Notes: The model is as follows: Rt = b0 + b1 ROIBt, where Rt is the return of Taiwan stock index futures; ROIBt is the relative order imbalance. The dotted bold line represents the coefcients for the OLS method, whereas the dotted line depicts the 95 percent condence intervals. The solid bold line traces the coefcients for the quantile regression, whereas the solid line depicts the 95 percent condence intervals.

The results for 15 and 30minute time intervals are similar to those in Table2. However, there are certain notable items observable in a comparison of them. Observing the lower quantiles of the results for 15 and 30minute time intervals, the ROIB is smaller and the sell orders are relatively more numerous. The 1 coefcients for the 5minute case are statistically signicant below the 20 percent quantile, whereas the 1 coefcients are only statistically signicant below the 10 percent quantile in the 15minute case and below the 5 percent quantile in the 30minute case. That is, the longer the time interval, the less effective the ROIB is as a predictor of futures returns when the number of new sell orders is relatively larger. Observing the higher quantiles, similar results are found to exist, with the effect disappearing rapidly. The 1 coefcients in the 5minute case are statistically signicant above the 75 percent quantile, whereas they are not statistically signicant for the 15minute and 30minute time intervals. The effects of the intraday futures returns become weaker as the time interval increases. In relation to the symmetric quantile test, quantile slope equality test, and the responses for the different quantiles, the results for 15 and 30minute time intervals are similar. Table 3 reports the results for the model, including the lagged order imbalance, the time-of-day dummy, liquidity, volume, and volatility as control variables. For brevity, we do not report the results of the coefcients of time variables, k. However, most of these coefcients are statistically signicant, indicating the importance of controlling for the time-of-day effect. After including the control variables, the coefcients of ROIBt1 in the lower quantiles remain signicant, such as the 5 percent and 10 percent in Table3, which was not found for the higher quantiles. In Table 3, the liquidity, volume, and volatility demonstrate a nearly consistently negative impact on intraday futures returns when the

Table 3. Coefcient estimations of the quantile regression model

Coefcient
11.310 8.361 7.518 6.274 5.450 4.696 3.745 2.254 0.101 0.307 15.998a 11.920a 5.443a 2.391a 1.715a 4.217a 5.447a 3.141a 4.015a 1.808a 19.244b 9.718b 9.763b 9.793b 108.402*** 198.835*** 267.861*** 219.405*** 0.95 0.90 0.85 0.80 2.841** 2.710** 0.379 0.208 0.143 0.308 0.380 0.247 0.321 0.152 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 11.646a 4.687a 16.440a 15.066a 18.504a 18.421a 11.549a 3.060a 1.311a 18.912b 18.670b 9.894b 9.837b 11.910*** 14.980*** 17.993*** 11.048*** 14.772*** 9.889** 10.203* 4.661*** 0.147 0.821 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 11.899 9.823 7.300 6.196 5.090 4.312 3.274 1.860 0.686

80 Emerging Markets Finance & Trade

Quantile

t-value

Quantile

Coefcient

t-value
13.978*** 10.844*** 12.714*** 11.932*** 15.595*** 12.194*** 7.364*** 5.240*** 2.013** 0.629 0.312 1.444 1.470 1.807* 2.017** 1.179 0.314 0.131 141.663*** 29.454*** 35.703*** 205.292***

Intercept

0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

ROIBt1

0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

LIQUIt

0.05 0.10 0.15 0.20

0.75 0.70 0.65 0.60 0.55 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 6.785c 5.519c 4.589c 3.853c 3.327c 2.633c 1.989c 1.190c 0.382c 4.231b 2.260b 1.661b 1.053b 0.499b 0.466b 0.204b 0.062b 0.004b

9.853b 9.882b 9.890b 9.917b 9.971b

228.966*** 235.089*** 203.293*** 198.155*** 239.830*** 24.951*** 23.313*** 21.253*** 23.284*** 18.051*** 15.973*** 9.006*** 6.172*** 1.908* 6.643** 2.939*** 3.872*** 2.683*** 2.391** 1.831* 0.714 0.269 0.023 (continues)

VOLt 3.714b 2.058b 1.324b 0.773b 0.444b 0.478b 0.268b 0.024b 0.118b 0.138b 4.851*** 5.331*** 4.714*** 1.653* 1.811* 1.335 1.198 0.070 0.405 0.585

0.25 0.30 0.35 0.40 0.45 0.50 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

9.797b 9.778b 9.826b 9.874b 9.481b 10.000b 6.772c 6.168c 5.403c 4.576c 3.875c 3.123c 2.443c 1.585c 1.308c 0.306c

130.213*** 149.850*** 141.774*** 64.415*** 4.468*** 238.592*** 33.077*** 32.581*** 32.332*** 21.682*** 18.937*** 16.146*** 12.203*** 7.388*** 5.298*** 1.318

VFt

0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

MayJune 2011 81

Table 3. Continued
Goodness-of-t statistics Adjusted R2 (percent) Quantile
35.248 24.433 17.922 13.065 9.260 6.188 3.603 1.570 0.387 0.866 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 36.749 24.734 18.332 14.056 10.617 7.793 5.478 3.645 2.083

82 Emerging Markets Finance & Trade

Quantile

Adjusted R2 (percent)

0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

Notes: For each 5-minute observation between October 1, 2006, and September 30, 2007, quantile regression of the following form is estimated: Rt = 0 + 1ROIBt 1 + k TIMEk ,t + 1LIQUI t + 2VOLt + 3VFt + t ,
k =1 59

where Rt is the return of Taiwan stock index futures, ROIBt1 is the relative order imbalance, TIMEk,t represents the time-of-day dummy, LIQUIt is the absolute futures returns divided by trading volume for time interval, |Rt|/Volt, Volt is trading volume, and VFt represents conditional volatility of the GARCH (1,1) model. a, b, and c mean to multiply by 102, 103, and 03, respectively.

MayJune 2011 83

futures return is lower, whereas positive impacts are found in the higher quantiles. The results for 15 and 30minute time intervals display similar results. Moreover, a proxy for liquidity is also the summation of the change in futures prices for each trade j and the squared futures returns over the trading volume over 5, 15, and 30minute intervals. The results consistently follow the proxy of absolute intraday futures returns over the trading volume. 2 Comparing our tted models including control variables, we used the adjusted R and 2 found that the quantile model with 50th quantile had higher adjusted R than the OLS model. Although the nonlinear model cannot report the whole pattern under different quantiles of futures returns, we adopted the Box-Cox nonlinear model (Ning and Tse 2009) to conrm the positive connection between the returns and order imbalance. For the test of robustness, two other main futures contracts are also included in this paper: TE (TSE electronic sector index futures) and TF (TSE banking and insurance sector index futures). Although not shown, the empirical results reveal similar results. That is, the positive impacts of the lagged order imbalances for the linear model exist, especially with regard to the larger coefcients at relatively lower quantiles. Regarding the pattern of the intraday data, Figure2 shows the returns from the futures market. Surprisingly, in contrast to previous studies for spot markets, the pattern of intraday data is Lshaped, rather than Ushaped; however, there exist higher futures returns at the market opening. Tian and Guo (2007) and Bildik (2001) further mentioned two Lshaped patterns of volatility of stock returns during the two trading sessions including morning and afternoon trading sessions. One possible explanation suggested for the Lshaped pattern in intraday futures return of the TAIFEX is that the relatively higher returns at the opening of the market are caused by the clustered arrival of public or private information, which accumulates during the overnight nontrading period. Copeland and Jones (2002) suggested that a relatively higher mean return at the opening of the trading sessions in Asian markets without market makers was generated signicantly by the accumulated overnight information and the halt of trade effect. Another possible reason is that the orders accumulated in the 15 minutes prior to opening and 5 minutes prior to closing must be matched by a call auction. Investors thus have to wait for a longer time before opening than during the closing stages of the market, and the higher futures returns in opening stages of the market compensate for their waiting time. Yet another possible explanation for the pattern is noise traders (their trades are unrelated to the arrival of information), who are particularly inuential in the Taiwanese futures market and have also been demonstrated to affect the opening stages of the Hong Kong stock market (Tang and Lui 2002). The large amount of unprocessed information accumulated overnight before the market is open leads to the noisiness of the opening prices. We suggest that the high intraday returns at the opening of the market are not entirely due to the trading mechanisms (i.e., a longer wait period for call auctions at market opening), but they are also due to the effects of both accumulated overnight information and noise traders. Finally, this paper observes the intraday pattern of ROIBs at both the markets opening and closing. From the results shown in Figure3, such a special pattern is not found. However, the buyers power becomes stronger at the close of the market. This result is different from that of Brock and Kleidon (1992), who pointed out that the transaction demand at the open and close were greater in the stock market.

84 Emerging Markets Finance & Trade

Figure 2. The intraday return patterns for the Taiwan Stock Index futures market

Figure 3. The intraday patterns of the relative order imbalances for the Taiwan Stock Index futures market

Conclusions This paper employs the quantile regression model to further observe the response of intraday futures returns using the ROIB in Taiwan. As most related studies employ data from the stock market in developed countries, our research also provides information on the relation between order imbalance and the intraday futures returns in emerging markets. Four main results are demonstrated in our empirical results. First, the intraday futures returns are affected by the relative order imbalance. However, as the time interval expands, the effects decrease as futures returns increase. Second, the results of the futures returns quantiles under different time intervals are sensitive to relatively higher or lower futures returns. In the median range of the intraday futures returns, the ROIB does not affect the futures returns. Third, it is observed that lower futures returns have a stronger effect, in terms of magnitude, on the intraday futures returns. Such a result has not been

MayJune 2011 85

observed previously using the conventional regression model. Finally, the intraday futures returns exhibit an Lshaped pattern in Taiwan, rather than a Ushaped pattern. This may be due to the effects of an overnight halt in trade, the accumulated information released, or noise traders. Notes
1. Huang and Chou (2007) dened the order imbalance as the proportion of buyer-/sellerinitiated trades to trading volume, according to Lee and Ready (1991). Transactions occurring above the prevailing quote midpoint are regarded as buyer-initiated trades, and those below the prevailing quote midpoint are regarded as seller-initiated trades. Only orders that have been matched are adopted to calculate order imbalance. 2. Some research refers to further discussions regarding the TAIFEX, such as optimal margin, reneging probability, and corresponding contract cost (Chou et al. 2006), market behaviors under limit order futures markets (Chen and Wu 2009), and the connection between the uptick rule and market efciency (Wang 2010). 3. The results of Phillips-Perron unit root tests in relation to the returns, volume, buying contracts, selling contracts, and ROIB reject the null hypothesis that the series has a unit root. Therefore, we were able to proceed to the next step to estimate the quantile regression model, avoiding the spurious regression.

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