Abstract
PurposeThis paper explores abnormal price changes in the FOREX by using both daily and intraday data on the EURUSD, USDJPY, USDCAD, AUDUSD and EURJPY exchange rates over the period 01.01.2008–31.12.2018.Design/methodology/approachIt applies a dynamic trigger approach to detect abnormal price changes and then various statistical methods, including cumulative abnormal returns analysis, to test the following hypotheses: the intraday behaviour of hourly returns on overreaction days is different from that on normal days (H1), there are detectable patterns in intraday price dynamics on days with abnormal price changes (H2) and on the following days (H3).FindingsThe results suggest that there are statistically significant differences between intraday dynamics on days with abnormal price changes and normal days respectively; also, prices tend to change in the direction of the abnormal change during that day, but move in the opposite direction on the following day. Finally, there exist trading strategies that generate abnormal profits by exploiting the detected anomalies, which can be seen as evidence of market inefficiency.Originality/valueNew evidence on abnormal price changes and related trading strategies in the FOREX.
Highlights
Abnormal price changes in financial markets are of interest to both academics and practitioners
The aim of the present paper is to examine whether daily abnormal price changes create market anomalies and are exploitable by means of suitable trading strategies in the case of the Foreign Exchange market (FOREX), focusing in particular on the EURUSD, USDJPY, USDCAD, AUDUSD and EURJPY exchange rates over the period 01.01.2008–31.12.2018 and using both daily and intraday data
This paper examines daily abnormal price changes in the FOREX using daily and intraday data on the EURUSD, USDJPY, USDCAD, AUDUSD and EURJPY exchange rates over the period 01.01.2008-31.12.2018
Summary
Abnormal price changes in financial markets are of interest to both academics and practitioners. The existing literature has tried to gain a deeper understanding of such anomalies by analysing their drivers (Mynhardt and Plastun, 2013), the existence of market overreactions (De Bondt and Thaler, 1985), possible patterns in price behaviour resulting from them (Bremer et al, 1997; Ferri and Min, 1996; Caporale et al, 2018) and their effects on market participants (Savor, 2012; Feldman et al, 2012) The latter seek to exploit them by developing profitable trading strategies (Lehmann, 1990; Jegadeesh and Titman, 1993; Pritamani and Singhal, 2001; Caporale et al, 2018)
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