Trading Imbalance in Chinese Stock Market-A High-Frequency View

Area of Science:

• Quantitative Finance
• Market Microstructure Analysis
• Behavioral Finance

Background:

• Market trends are significantly influenced by the imbalance between buying and selling activities.
• Existing measures lack the granularity to analyze this trading behavior effectively.
• A high-frequency indicator is needed to capture the dynamics of trading desire.

Purpose of the Study:

• To propose a novel high-frequency indicator, termed "polarity," to measure the direction and magnitude of trading imbalance.
• To investigate the relationship between polarity and market returns at both market and stock levels.
• To assess the reliability of polarity in reflecting real-time market sentiment and behavior transitions.

Main Methods:

• Development of a new indicator, "polarity," based on transaction datasets to analyze trading desire at the micro-unit level.
• Empirical investigation of the correlation between polarity and returns, considering lagged effects and varying market conditions.
• Aggregation of one-minute polarity data into daily signals to analyze market-level behavior and sentiment.

Main Results:

• A significant relationship was found between lagged polarities and returns (positive) and current polarity and returns (negative).
• These associations were observed to fluctuate based on prevailing market conditions.
• Aggregated daily polarity signals demonstrated significant correlations with market emotion and reliability in capturing market-level behavior shifts.

Conclusions:

• The proposed "polarity" indicator offers a high-frequency, data-driven method for understanding and forecasting market behavior.
• Polarity serves as a real-time reflection of market sentiment and condition.
• This novel indicator enhances the analysis of market microstructure by quantifying trading desire.