Tick Size and Price Reversal after Order Imbalance

Espen Sirnes and Minh Thi Hong Dinh
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Minh Thi Hong Dinh: Inland School of Business and Social Sciences, Inland Norway University of Applied Sciences, 2418 Elverum, Norway

IJFS, 2021, vol. 9, issue 2, 1-13

Abstract: It is well known that intraday returns tend to reverse the following intraday period, conditional on excess buying pressure on the bid or ask side. This suggests that liquidity providers “overreact” to order imbalance (OIB) by initially altering quotes so much that a negative autocorrelation is seen in mid-price returns. We investigate under which circumstances this behavior is most common. Specifically, it seems the tick size augments “OIB-reversal”. However, if the tick size is binding for much of the trading day, it has the opposite effect of censoring such reversals. In addition, if market liquidity is high, the reversal becomes more frequent.

Keywords: finance; OIB; order imbalance; market microstructure (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2021
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