Price Gap Anomaly in the US Stock Market: The Whole Story

39 Pages Posted: 10 Oct 2019

See all articles by Oleksiy Plastun

Oleksiy Plastun

Sumy State University

Xolani Sibande

University of Pretoria - Department of Economics

Rangan Gupta

University of Pretoria - Department of Economics

Mark E. Wohar

University of Nebraska at Omaha

Date Written: August 12, 2019

Abstract

This paper analyses the price gap anomaly in the US stock market (comprised of the DJI, S&P 500 and NASDAQ) covering the period 1928 to 2018. This paper aims to investigate whether or not price gaps create market inefficiencies. Price gaps occur when the current day’s opening price is different from the previous day’s closing price due orders placed before the opening of the market. Several hypotheses are tested using various statistical tests (Student’s t-test, ANOVA, Mann-Whitney test), regression analysis, and special methods, that is, the modified cumulative returns and the trading simulation approaches. We find strong evidence in favour of abnormal price movements after price gaps. We observe that during a gap day prices tend to change in the direction of the gap. A trading strategy based on this anomaly was efficient in that its results were not random, indicating that this market was not efficient. The momentum effect was found to be temporary and no evidence of seasonality in price gaps was found. Lastly, our results were also contrary to the myth that price gaps tend to get filled.

Keywords: Price Gap Anomaly, Trading Strategy, Stock Market, Momentum Effect, Efficient Market Hypothesis

JEL Classification: G12, C63

Suggested Citation

Plastun, Oleksiy and Sibande, Xolani and Gupta, Rangan and Wohar, Mark E., Price Gap Anomaly in the US Stock Market: The Whole Story (August 12, 2019). Available at SSRN: https://ssrn.com/abstract=3461283 or http://dx.doi.org/10.2139/ssrn.3461283

Oleksiy Plastun (Contact Author)

Sumy State University ( email )

Rymskyi-Korsakov str., 2
Sumy, 40000
Ukraine

Xolani Sibande

University of Pretoria - Department of Economics ( email )

South Africa

Rangan Gupta

University of Pretoria - Department of Economics ( email )

South Africa

Mark E. Wohar

University of Nebraska at Omaha ( email )

Department of Economics
6708 Pine Street MH 332S
Omaha, NE 68182
United States
402-554-3712 (Phone)
402-554-2853 (Fax)

HOME PAGE: http://cba.unomaha.edu/faculty/mwohar/WEB/homepage.html

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