Long-Range Correlations in Chinese Stock Order Aggressiveness

Summary

This study investigates persistence in the aggressiveness of orders for 43 Chinese stocks. Order aggressiveness is relevant to order flow: the familiar diagonal effect describes how orders tend to be followed by orders with similar aggressiveness. The research asks whether these sequences also contain correlations over longer horizons.

Using detrending moving average analysis, the authors identify crossovers in scaling behavior and propose an objective way to estimate two Hurst indexes around the crossover. They report no short-term correlations but strong long-term correlations for all but one stock, with the strength of the longer-horizon effect related to firm-specific characteristics. A multifractal version of the analysis also detects nonlinear long-term correlations. The findings describe statistical structure in the sampled order flow; the provided account does not specify the firm characteristics involved, explain the outlier, or establish how the correlations could be used in execution or trading.

Key ideas

• The analysis tests long-range dependence in order aggressiveness across 43 Chinese stocks.
• Detrending moving average analysis reveals crossovers in scaling behavior.
• An objective procedure estimates separate Hurst indexes on either side of the crossover.
• The authors report no short-term correlations and strong long-term correlations, except for one stock.
• The long-term effect varies with firm characteristics, and multifractal analysis finds nonlinear correlations.

Tags

# Linear and nonlinear correlations in order aggressiveness of Chinese stocks


# Linear and nonlinear correlations in order aggressiveness of Chinese stocks









The diagonal effect of orders is well documented in different markets, which states that orders are more likely to be followed by orders of the same aggressiveness and implies the presence of short-term correlations in order flows. Based on the order flow data of 43 Chinese stocks, we investigate if there are long-range correlations in the time series of order aggressiveness. The detrending moving average analysis shows that there are crossovers in the scaling behaviors of overall fluctuations and order aggressiveness exhibits linear long-term correlations. We design an objective procedure to determine the two Hurst indexes delimited by the crossover scale. We find no correlations in the short term and strong correlations in the long term for all stocks except for an outlier stock. The long-term correlation is found to depend on several firm specific characteristics. We also find that there are nonlinear long-term correlations in the order aggressiveness when we perform the multifractal detrending moving average analysis.

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