Introduction
 price evolution of liquid stocks after large intraday
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price change
Significant reversal
Volatility and volume stay high
NYSE-widen bid-ask spread
NASDAQ-almost constant bid-ask spread
NYSE versus NASDAQ
Able to adjust for
dividend & stock split
No dividend & stock split
info
Includes all transactions
and the best bid-ask
spread
Computer basedoccasionally single
transactions filed outside
bid-ask spread
Trading data from 09301600
Trading data from 09301600
Defining Large Price Changes
 Absolute Filter
 Intraday price change > 2-6%
within 10-120 mins
 Relative Filter
 Price move exceeding 6-10
times the normal volatility
during that time of the day
 Omit first 5mins and last
60mins of trading
Calculation of Average
 Calculate average minute volatility, trading volume and
bid ask spread based on 60 pre-event trading days
• Compare volatility,
volume and spread with
pre-event minute
average.
Beta
 Measure of volatility of a portfolio in comparison to
the market
 Calculated using daily stock prices and index changes
of the 60 pre event trading days
 Beta may change after large price shocks
 Post-event abnormal return calculated using beta
computed using 60 post-event trading days
Results-Intraday Price Reaction
 Significant reversal 10-60mins after event
 Faster reversal for price increases
 Price reversal is bigger for decreases after 30-60mins
interval
 Abnormal return =
Raw return – (beta * index return)
 AR and RR very close
Price Reversal
NYSE price evolution
NASDAQ price evolution
Stability of Price Reversal
 Size of filter does not affect existence of overreaction
 60-minute long price drops exceeding 2-6% and 6-10 times the
average 60-minute volatility
 Length of price drop affects validity of results
 10-minute to 120 minute long price drops exceeding 4% and 8 times
the average
 “Intraday reversal puzzle”
 Chartist traders overreact irrationally compared to fundamentalist
traders, which lead to pricing error that is later reversed.
 Natural consequence of the existence of informed and uninformed
traders.
 Linear relationship between size of original price drop and size of
rebound.
60-min raw returns after intraday 60-min price drops
exceeding 2-6% and 6-10 times average 60-min volatility
60-min raw returns after intraday 10-120-min price changes
exceeding 4% and 8 times the average 10-12-min volatility
Evolution of volatility and volume
 Transaction dollar volume increase sharply at even up to 8
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9 times of its value during pre-event days.
Volume and volatility decrease only very slowly after the
event.
Decrease of post-event excess volatility well fitted by
power-law, but not volume.
Volatility from extreme events decay faster than
autocorrelation, possible due to large shocks being more
likely to be exogenous than all fluctuations.
Bid-ask spread stays virtually unchanged on the NASDAQ
but increases to 6 times its pre-event value on NYSE.
Evolution of volatility and
volume on NYSE and NASDAQ
Decay of Volatility on NASDAQ
Decay of Volume on NASDAQ
Evolution of bid-ask spread on
NYSE and NASDAQ
Profitability of Contrarian
Strategies
 Contrarian trading strategy yields significant abnormal
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profit on NASDAQ during the post-event 30-60 min by
buying at ask price at min 0 and selling at bid at min 30.
Profits are lower or insignificant on NYSE due to wide bidask spread.
Not true that profits on NASDAQ can only be acquired by
traders who are amazingly fast.
Profits limited by number of shares available at the best bid
and ask price but significantly larger than 0.
Further studies should examine exact profitability taking
into account transaction costs and costs of monitoring.
Contrarian Trading Strategy
 Strategy when an investor attempts to profit by going
against the trend
 Used the direction of the trend to identify profitable
opportunities.
 Buy low, sell high
 Decision-making process goes against human emotion
Intraday profitability of
Contrarian Strategy
Future Possible Research
 Apart from NYSE and NASDAQ, which other stock
exchanges would be suitable for this strategy and why?
 To consider the use of volume as an additional filter?
 Is it worth it?
 Transaction costs
 Cost of monitoring stocks
 In 1963-67, significant rebound of 1.87% expected on 1st 3
days.
 1987-1991, rebound of 0.06%-Implication that overreaction
is a sign of market inefficiency. Future?
 Risks involved-dead cat bounce
Conclusion
 Significant overreaction on NYSE and NASDAQ. Stability
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analysis confirms findings.
Call to attention “intraday reversal puzzle” due to
behavioral trading
Different behavior of bid-ask spread on NYSE and
NASDAQ due to different market mechanisms
Volatility , volume and bid-ask spread increase sharply at
the event and stay significantly high long after price
adjustment. Post-event decay of excess volatility welldescribed by power-law.
Intraday contrarian trading strategies are profitable in the
event of extreme price changes.
Exact profitability of such strategy should be studied
further.