Abstract
This paper explores price (momentum and contrarian) effects and their timing parameters on the days characterised by abnormal returns and the following ones in two commodity markets. Specifically, using daily gold and oil price data over the period 01.01.2009–31.03.2020 the following hypotheses are tested: (H1) there is a time gap between the detection of an abnormal return day and the end of that day, (H2) there are price effects on the day after abnormal returns occur; (H3) price effects after 1-day abnormal returns have identifiable timing parameters; (H4) the detected timing parameters can be used to “beat the market”. For these purposes average analysis, t tests, CAR and trading simulation approaches are used. The main results can be summarised as follows. Prices tend to move in the direction of abnormal returns till the end of the day when these occur. The presence of abnormal returns can usually be detected before the end of the day by estimating specific timing parameters, and a momentum effect can be detected. On the following day two different price patterns are detected: a momentum effect for oil prices and a contrarian effect for gold prices, respectively. These effects are limited in time, and the corresponding timing parameters are estimated. Trading simulations show that these effects can be exploited to generate abnormal profits with an appropriate calibration of the timing parameters.
Highlights
The efficient market hypothesis (EMH) developed by Fama (1970) remains the dominant paradigm to understand asset price behaviour
As for 1-day abnormal returns and the price patterns they generate, Caporale et al (2018) reported that a strategy based on counter movements after 1-day abnormal returns does not generate profits in the Forex and the commodity markets, but it is profitable in the case of the US stock market
The first column specifies the series used; the second column shows the number of trades in units; the third column provides the number of successful trades in units; and the fourth column shows this parameter in %; the fifth column shows the profit generated by the trading strategy over the whole period in %; the sixth column shows the annual profit in %; and the seventh column provides information about the size of profit per trade; the eighth column reports the t test statistics; and the ninth column reports whether or not they imply a rejection of the null
Summary
The efficient market hypothesis (EMH) developed by Fama (1970) remains the dominant paradigm to understand asset price behaviour It implies that prices should follow a random walk without any detectable patterns that can be exploited to generate abnormal profits. The present paper contributes to this limited literature by examining whether there exist price (momentum or contrarian) effects after 1-day abnormal returns, and estimating timing parameters for these effects. For these purposes oil and gold daily prices over the period 01.01.2009–01.09.2019 are analysed and a number of hypotheses of interest are tested using average analysis, t tests, cumulative abnormal returns (CAR) and trading simulation approaches.
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