Momentum effects in the cryptocurrency market after one-day abnormal returns

Guglielmo Maria Caporale,Alex Plastun

doi:10.1007/s11408-020-00357-1

Abstract

This paper examines whether there exists a momentum effect after one-day abnormal returns in the cryptocurrency market. For this purpose, a number of hypotheses of interest are tested for the Bitcoin, Ethereum and Litecoin exchange rates vis-à-vis the US dollar over the period 01.01.2015–01.09.2019, specifically whether or not: (H1) the intraday behavior of hourly returns is different on abnormal days compared to normal days; (H2) there is a momentum effect on days with abnormal returns, and (H3) after one-day abnormal returns. The methods used for the analysis include various statistical methods as well as a trading simulation approach. The results suggest that hourly returns during the day of positive/negative abnormal returns are significantly higher/lower than those during the average positive/negative day. The presence of abnormal returns can usually be detected before the day ends by estimating specific timing parameters. Prices tend to move in the direction of the abnormal returns till the end of the day when it occurs, which implies the existence of a momentum effect on that day giving rise to exploitable profit opportunities. This effect (together with profit opportunities) is also observed on the following day. In two cases (BTCUSD positive abnormal returns and ETHUSD negative abnormal returns), a contrarian effect is detected instead.

Highlights

It is well known that the efficient-market hypothesis (EMH) is inconsistent with the existence of abnormal returns, i.e., of fat tails in the price distribution
A number of hypotheses of interest are tested for the Bitcoin, Ethereum and Litecoin exchange rates vis-à-vis the US dollar over the period 01.01.2015–01.09.2019, whether or not: (H1) the intraday behavior of hourly returns is different on abnormal returns days compared to normal days; (H2) there is a momentum effect on abnormal returns days, and (H3) after one-day abnormal returns
This paper explores the momentum effect in the cryptocurrency market after one-day abnormal returns

Summary

Introduction

It is well known that the efficient-market hypothesis (EMH) is inconsistent with the existence of abnormal returns, i.e., of fat tails in the price distribution. The present paper extends the analysis of Caporale and Plastun (2019) by examining whether there exists a momentum effect after one-day abnormal returns in the cryptocurrency market. By specifying timing parameters for these effects, it is possible to design profitable trading strategies based on the detected anomalies Their presence in a market normally considered one of the most efficient is a very interesting finding. Our findings are relevant to both academics interested in the validity of the efficientmarket hypothesis (EMH) and practitioners (traders, investors, financial analysts, etc.) aiming to design profitable trading strategies based on the possible existence of momentum effects, the timing of abnormal returns and the duration of the anomaly.

Literature review

Methodology

Empirical results

1.87 Rejected

Findings

Conclusion