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

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Oleksiy Plastun

Sumy State University

Date Written: March 29, 2019

Abstract

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

Caporale, Guglielmo Maria and Plastun, Oleksiy, Price Overreactions in the Forex and Trading Strategies (March 29, 2019). Brunel University London, Economics and Finance Working Paper Series, No. 19-09, Available at SSRN: https://ssrn.com/abstract=3362142 or http://dx.doi.org/10.2139/ssrn.3362142

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance ( email )

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London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Oleksiy Plastun (Contact Author)

Sumy State University ( email )

Rymskyi-Korsakov str., 2
Sumy, 40000
Ukraine

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