Intraday Anomalies and Market Efficiency: A Trading Robot Analysis

Guglielmo Maria Caporale,Luis Gil-Alana,Inna Makarenko,Alex Plastun

doi:10.1007/s10614-015-9484-9

Abstract

One of the leading criticisms of the efficient market hypothesis is the presence of so-called anomalies, i.e. empirical evidence of abnormal behaviour of asset prices which is inconsistent with market efficiency. However, most studies do not take into account transaction costs. Their existence implies that in fact traders might not be able to make abnormal profits. This paper examines whether or not anomalies such as intraday or time of the day effects give rise to exploitable profit opportunities by replicating the actions of traders. Specifically, the analysis is based on a trading robot which simulates their behaviour, and incorporates variable transaction costs (spreads). The results suggest that trading strategies aimed at exploiting daily patterns do not generate extra profits. Further, there are no significant differences between sub-periods (2005---2006--normal; 2007---2009--crisis; 2010---2011--post-crisis).

Highlights

The efficient market hypothesis (EMH) has been highly criticised during the last twenty years, especially on the basis of empirical evidence suggesting the presence of so-called “anomalies”, i.e. abnormal behaviour of asset prices which is seen as inconsistent with market efficiency
Since the seminal work of Mandelbrot (1963), several studies have shown that the Gaussian distribution provides a poor fit to the behaviour of asset prices, not being compatible with the random walk model implied by the EMH
The empirical relevance of the EMH has been called into question by many studies finding evidence of so-called anomalies seemingly giving agents the opportunity to make abnormal profits

Summary

Introduction

The efficient market hypothesis (EMH) has been highly criticised during the last twenty years, especially on the basis of empirical evidence suggesting the presence of so-called “anomalies”, i.e. abnormal behaviour of asset prices which is seen as inconsistent with market efficiency. We focus on one of the best known anomalies, which is the presence of intraday patterns, i.e. more intensive trading at the beginning and the end of the trading day combined with higher price volatility (Admati and Pfleiderer 1988). Harris (1986) showed that prices and last trades tend to be up during the first 45 min of trading sessions (all days except Monday). Such patterns were mentioned by Thaler (1987) and Levy (2002). Such patterns were mentioned by Thaler (1987) and Levy (2002). Strawinski and Slepaczuk (2008) found evidence of intraday patterns in the Warsaw Stock Exchange as well

Objectives

Results

Conclusion