NAME: SULTAN AHMAD

Roll NO: BAFE 20-48

Class: BS ACCOUNTING AND FINANCE (EVEN)
 Business research proposal

A WORKING TITLE:
Investigating the profitability of the order-flow
and order book imbalance technical rules in stock market.

Background of the study:

This study conducts an intraday technical analysis of individual stocks listed on the
Nikkei 225. In addition to the price-based technical rules popularly examined in the
literature, we uniquely propose and statistically investigate technical rules that utilize
information regarding (1) the order-flow imbalance and (2) the order-book imbalance.
Technical analysis using the imbalance-based trading rules is motivated by the evidence
presented first in this paper that short-term returns can be predicted from the
information regarding the order-flow and order-book imbalances for more than half of
Nikkei 225-listed stocks.

Technical analysis involves the use of historical market data, such as price, volume, and
other observables, to predict future re turns in financial assets. This technique has been
widely used by financial market professionals and much investigated by academic
researchers. Numerous empirical studies of technical analysis have also been carried
out, particularly since the 1960s.2 Thus far, real market professionals and academic
researchers have paid particular attention to past price data in order to evaluate the
profitability of technical trading rules.

In addition to linking past prices to technical trading strategies, as has been typically
carried out by previous studies, the present paper makes a unique contribution to the
body of knowledge on this topic by relating (1) the order-flow imbalance and (2) the
order-book imbalance to the profitability of intraday technical trading rules. Second,
previous studies demonstrate significant relations among the current order imbalance,
namely the difference between the current market depths of the buy side and the sell
side, investors’ trading decisions, and stock price dynamics. This study is also motivated
by the several previous research studies that demonstrate that order-flow and order-
book imbalances have a predictive ability with respect to short-horizon return.

The problem statement:

The problem statement of this business proposal is that why stock markets are facing
the imbalance of the order-flow and order book technical rules. And also we will
investigate why financial market professionals heavily rely on technical trading
strategies to form their trading plans.

 The purpose of the study:

The purpose of this study is to find the problem of imbalance of order flow and
order book by doing different type research through Articles, newspapers, internet, and
stock market reports. So we can understand the problem and find out the issue that we
are facing in stock markets.

 Research questions:
1. Why financial markets are facing the imbalance in technical
rules?
2. Is there any illiquidity in stock markets?
3. What methods use financial market professionals to solve
imbalance of order-flow and order book?
4. What is the purpose of this business research proposal?

 The scope of the study:

The scope of this study is to find the main issue of technical imbalance in the
order-flow and order book that financial and stock markets are facing these days.
 So we can make market fair, trustable and for everyone. After we will complete
and find out the solution we will be able to make market fair and reliable for
those who invest in stock markets. And also attract more peoples towards
markets.

The research design offering details on:

 Type of study exploratory – descriptive:

This study is exploratory because this is not clearly defined and we study and
investigate the insight problems of stock markets and make a hypothesis for this
business proposal.
We will find out this by using different data collection methods.
 Data collection methods
Following are the data collection methods:
 Through websites
 Published articles
 Stock markets annual reports
 Newspapers
 By doing survey of markets
 Consult with markets professionals
 Magazines

Literature review:
This study sorts the stock markets in our sample into quartiles according to market
capitalization at the end of our sample period in order to present size-stratified results
Prior to investigating the profitability of technical trading strategies in the next section,
this subsection examines the statistical properties of returns and determines the
statistical tests appropriate for examining the performance of technical trading
strategies.
Although our most significant contribution is that we propose and statistically
investigate unexamined technical rules that are formulated based on order-flow and
order-book imbalances, while also taking into account the effect of data snooping.

Second, rather than using stock indices as is typical in the literature, we utilize individual
stocks in our analyses. Such an approach has the following two advantages.

Data analysis:
We utilize the dataset provided by Nikkei Media Marketing, Inc. This contains the
following information: (1) transaction prices with time stamps; (2) whether trades occur
at the best bid or ask (from which the direction of trades can be determined)12; (3)
whether the prices are determined in the opening or closing sessions; and (4) order-
book information, such as five limit orders from the best quotes with the depth
available at these limit prices.

In terms of our third contribution, we investigate the performance of technical trading

rules in terms of firm size. The size stratified analyses provide insights into whether the
differences in the results may be attributed to information asymmetry in the market,
institutional herding, or order splitting. t. In addition, technical traders in reality would
have more trading options if we were able to provide profitable technical rules based on
order-flow information.

Conclusion:
This study empirically investigates the trading performances of intraday technical rules
in individual stocks on the stock market. In addition to the price-based trading rules
commonly examined in previous papers, we make a unique contribution to the body of
knowledge on this topic by proposing and statistically investigating the technical rules
that are formulated based on (1) the order-flow imbalance and (2) the order-book
imbalance.
After we will complete and find out the solution we will be able to make market fair and
reliable for those who invest in stock markets. And also attract more peoples towards
markets.

References:
Biais, B., Hillion, P., Spatt, C., 1995. An empirical analysis of the limit order book and the order flow in
the Paris Bourse. Journal of Finance 50, 1655–1689. Brock, W., Lakonishok, J., LeBaron, B., 1992. Simple
technical trading rules and the stochastic properties of stock returns. Journal of Finance 37, 1731–1764.
Chordia, T., Subrahmanyam, A., 2004. Order imbalance and individual stock returns: theory and
evidence. Journal of Financial Economics 72, 486–518. Chordia, T., Roll, R., Subrahmanyam, A., 2005.
Evidence on the speed of convergence to market efficiency. Journal of Financial Economics 76, 271–292.
Chordia, T., Roll, R., Subrahmanyam, A., 2008. Liquidity and market efficiency. Journal of Financial
Economics 87, 249–268. Comerton-Forde, C., Rydge, J., 2006. The current state of Asia-Pacific stock
exchanges: a critical review of market design. Pacific-Basin Finance Journal 14, 1–32