Abstract
This paper analyzes price gaps in the Ukrainian stock market for the case of UX index over the period 2009–2018. Using different statistical tests (Student’s t-tests, ANOVA, Mann-Whitney test) and regression analysis with dummy variables, as well as modified cumulative approach and trading simulation, the authors test a number of hypotheses searching for price patterns and abnormal market behavior related to price gaps: there is seasonality in price gaps (H1); price gaps generate statistical anomalies in the Ukrainian stock market (H2); upward gaps generate price patterns in the Ukrainian stock market (H3) and downward gaps generate price patterns in the Ukrainian stock market (H4). Overall results are consistent with the Efficient Market Hypothesis: there is no seasonality in price gaps and in most cases there is no evidences of price patterns or abnormal price behavior after the gaps in the Ukrainian stock market. Nevertheless, the authors find very strong and convincing evidences in favor of momentum effect on the days of negative gaps. These observations are confirmed by trading simulations: trading strategy based on detected price pattern generates profits and demonstrates overall efficiency, which is against the market efficiency. These results can be interesting both for academicians (further evidences against market efficiency) and practitioners (real and effective trading strategy to generate profits in the Ukrainian market market).
Highlights
Efficient Market Hypothesis (EMH) is a theory that, on the one hand, is equated by the theoretical financiers to the meta-theory, and on the other hand, it is perhaps the most criticized hypothesis from practitioners who are actively looking for its discrepancies
As can be seen, trading strategy based on momenwith dummy variables tum effect after negative price gaps is profitable
Calculations show that there is no seasonality in price gaps: the number of gaps is distributed mostly equal among different days of the week
Summary
Efficient Market Hypothesis (EMH) is a theory that, on the one hand, is equated by the theoretical financiers to the meta-theory, and on the other hand, it is perhaps the most criticized hypothesis from practitioners who are actively looking for its discrepancies (so-called anomalies). Study of numerous anomalies has an important theoretical and applied effect both in view of the development of the theory of financial markets and for purely practical reasons – the development of trading practices and profitable trading strategies. One of these anomalies is the price gap anomaly (the difference between the opening prices of current market day and closing prices in previous day). Using different statistical tests and methods including Student’s t-tests, ANOVA, Mann-Whitney test, regression analysis with dummy variables, modified cumulative approach and trading simulation four hypotheses of interest are tested: there is seasonality in price gaps (H1); price gaps generate statistical anomalies in the Ukrainian stock market (H2); upward gaps generate price patterns in the Ukrainian stock market (H3) and downward gaps generate price patterns in the Ukrainian stock market (H4)
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