Interaction between Returns and Order Flow Imbalances: Endogeneity, Intraday Variations, and Macroeconomic News Announcements

Abstract: The study examines the interaction between returns and order flow imbalances (differences between buy and sell orders), constructed from the best bid and offer files of S&P 500 E-mini futures contract, using a structural vector autoregressive model. The intraday variation in market activity is considered by applying the model for each short interval each day, whereas the endogeneity due to time aggregation is handled by estimating the structural parameters via the identification through heteroskedasticity. The estimation results show that significant endogeneity exists and that the estimated parameters and impulse responses exhibit significant intraday variations, reflecting intense or mild order submission activities. Further, the estimated parameters change around macroeconomic news announcements, suggesting inactive order submission periods exist when they occur. Overall, such announcement effects are mostly explained by the order submission activities reflecting the public information.