Price Overreactions in the Forex and Trading Strategies
Brunel University London, Economics and Finance Working Paper Series, No. 19-09
49 Pages Posted: 30 Apr 2019
Date Written: March 29, 2019
This paper explores price overreactions in the FOREX by using both daily and intraday data on the EURUSD, USDJPY, USDCAD, AUDUSD and EURJPY exchange rates over the period 01.01.2008-31.12.2018. It applies a dynamic trigger approach to detect overreactions and then various statistical methods, including cumulative abnormal returns analysis, to test the following hypotheses: the intraday behaviour of hourly returns on overreaction days is different from that on normal days (H1), there are detectable patterns in intraday price dynamics on overreaction days (H2) and on the following days (H3). The results suggest that there are statistically significant differences between intraday dynamics on overreaction and normal days respectively; also, prices tend to change in the direction of the overreaction during the overreaction day, but move in the opposite direction on the following day. Finally, there exist trading strategies that generate abnormal profits by exploiting the detected anomalies, which can be seen as evidence of market inefficiency.
Keywords: FOREX, Anomalies, Overreactions, Abnormal Returns, Patterns
JEL Classification: G12, G17, C63
Suggested Citation: Suggested Citation