Study On The Security Investment Strategies Based On Order Flow

Markowitz and Tobin proposed the Mean-variance model, marking the beginningof the development of modern portfolio theory. Since then, scholars from variouscountries have deeply studied the Mean-variance model, constructed differentportfolios based on the Mean-variance model and proposed different investmentstrategies. On the other hand, the development of financial market microstructuretheory provides a new direction for the development of portfolio theory. As a corevariable of the market microstructure theory, order flow not only has a clear andintuitive meaning, but also can characterize the flow of funds, has a wealth ofinformation content, and reflects investor's portfolio rebalancing. Therefore, this paperuses order flow to depict the flow of funds, choose stocks and plate to invest, build onthe portfolio investment strategies based on order flow, and analyze the risk ofinvestment strategies. This can provide a reference for the equity investors and guideinvestors' investment decisions.Firstly, this paper introduces order flow to depict the net inflow and net outflow offunds, and selects stocks and plates according to the flow of funds, proposes the stockand plate selection method based on order flow. This paper uses event study to analyzethe general characteristics of stocks and plates that securities analysts recommend.Based on these characteristics, this paper uses the Naive Bayes Classifier (NBC) toclassify Shenzhen Component Index stock and all the plates into sections in line withthese characteristics or not. We screen stocks and plates that meet these characteristics,calculate their return, and compare it with the return of stocks and plates that analystsrecommend and the Shenzhen Component index return. The empirical results showthat the return obtained by the stock and plate selection method based on order flow ishigher than the stocks and plates analysts recommend. Also, it is higher than the indexreturn, and can gain significant excessive return.Secondly, this paper introduces order flow into the establishment of securitiesinvestment strategy, and puts forward the static investment strategy based on orderflow. From the perspective of investors' expected utility maximization, this paper introduces order flow into the portfolio model, determine the portfolio weightsaccording to order flow indicator, and build the portfolio model based on order flow.Through mathematical derivation, we obtain optimal weights of the securityinvestment portfolio under two conditions of only contained risky assets and containedboth risk assets and risk-free asset. On this basis, the paper proposes static investmentstrategy based on order flow, and determines the optimal weight of the staticinvestment strategy according order flow indicator. Selecting30stocksfrom the Shenzhen A shares to empirically analyze, the results show that determiningthe investment weights according to order flow indicator, we can obtain higherinvestment return than the Mean-variance model and the market index.Thirdly, considering various investment period, from the perspective of investors'expected utility maximization, this paper introduces order flow indicator, buildsmulti-period dynamic portfolio model with transaction costs. In each Investmentperiod, we dynamically adjust portfolio weights according to the order flow impactcoefficient. We use mathematical derivation to solve the optimal weights of thedynamic portfolio model. Then we propose the dynamic investment strategy based onorder flow, and dynamically adjust the investment weights according to order flowimpact coefficient. Selecting30stocks from the Shenzhen A shares for empiricalanalysis, the results show that the dynamic investment strategy based on order flow notonly can beat the market index, but also can get higher return than the Mean-varianceportfolio.Finally, this paper analyzes the risk of the securities investment strategies basedon order flow. Based on order flow, we propose the order impact coefficient, andconstruct the binary GARCH model of order impact coefficient and return to testvolatility spillover between order impact coefficient and return. On this basis, weanalyze the volatility of return according to the volatility of order flow impactcoefficient, then analyze the risk of the securities investment strategies based on orderflow. The Shenzhen Composite Index stocks are divided into high and low orderimpact coefficient stock portfolios. This paper compares the risk of different orderimpact coefficient stock portfolios, and does an evaluation. The results show that thereis bi-dictional volatility spillover effect between the return and order impact coefficient.The return of high order impact coefficient stock portfolio is higher, but its risk is higher. This indicates that the securities investment strategies based on order flowconstructed in this paper can gain higher return, it also bears a higher risk meantime.Evaluation results show that compared with low order impact coefficient stockportfolio, high order impact coefficient stock portfolio can gain higher risk premium.