Abstract

This paper tracks the performance of order-imbalance based, momentum type trading strategy in the stock market. Buying previous day’s heavily bought stocks and selling the heavily sold stocks earns statistically significant positive return. However, the magnitude of these returns has been steadily declining post 1998. Known asset pricing factors do not explain these returns. Investor sentiment is able to explain at least some of these returns, supporting the notion that behavioral factors influence asset returns at least in the short run. Our results are robust to the calculation of returns using midpoints of quoted bid-ask prices, suggesting that microstructure biases are not driving our results.

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