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Implementation and Evaluation of an Order Flow Imbalance Trading Algorithm

Building upon the success of their 2010 model, in 2014 Cont et al. published a follow-on paper titled The Price Impact of Order Book Events which found that that Order Flow Imbalance (OFI) derived from the limit order book model has a statistically significant correlation to contemporaneous price movement at very short time frames . The purpose of this work is to build and test a predictive model based on Cont’s descriptive work. More specifically, if change in OFI in time interval [t_(k-1),t_k] is significantly correlated with price change within the same timeframe, does this correlation similarly hold true on a forward looking basis if price change is advanced one period in the future, [t_k,t_(k 1)]?