Order Imbalance, Liquidity, and Market Efficiency: Evidence from the Chinese Stock Market


School of Economics and Management, Tsinghua University, Room 119, Shunde Building, Haidian District, Beijing 100084, China. E-mail: hai.sky687@gmail.com


We used data from the Chinese stock market to quantify the amount of time for the market to converge to efficiency. Order imbalance may predict returns when there is no designated market maker. In spite of availability of the direction of trade information in the Chinese stock market, it takes longer for information regarding order imbalance to be incorporated into stock prices in China than in the USA. With information on past returns and order imbalance, it takes between 15 and 30 min to converge to efficiency in the Chinese stock market. The process of converging to efficiency depends highly on liquidity. Copyright © 2011 John Wiley & Sons, Ltd.