Momentum effects in the cryptocurrency market after one-day abnormal returns
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Momentum effects in the cryptocurrency market after one-day abnormal returns Guglielmo Maria Caporale1,2
· Alex Plastun3
© The Author(s) 2020
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. Keywords Cryptocurrency · Anomalies · Momentum effect · Abnormal returns · Patterns
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11408-02 0-00357-1) contains supplementary material, which is available to authorized users.
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Guglielmo Maria Caporale [email protected] Alex Plastun [email protected]
1
Department of Economics and Finance, Brunel University, London UB8 3PH, UK
2
CESifo and DIW Berlin, Berlin, Germany
3
Department of International Economic Relations, Sumy State University, Sumy, Ukraine
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G. M. Caporale, A. Plastun
JEL Classification G12 · G17 · C63
1 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. However, numerous empirical studies have reported evidence of so-called market overreactions. De Bondt and Thaler (1985) developed the overreaction hypothesis to describe price patterns caused by abnormal price changes. The subsequent literature has also analyzed the reasons for abnormal price changes (Griffin and Tversky 1992; Aiyagari and Gertler 1999; Madura and Richie 2004; Mynhardt and Plastun 2013); price patterns (Cutler et al. 1991; Ferri and Min 1996); trading strategies based on overreactions (Jegadeesh and Titman 1993; Caporale and Plastun 2019); the influence of price overreactions on market participants (Savor 2012), etc. According to the overreaction hypothesis, there should be price r
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