Evolution of Price Effects After One-Day of Abnormal Returns in the US Stock Market

Abstract

This paper provides a comprehensive analysis of price effects after one-day abnormal returns and their evolution in the US stock market for the case of Dow Jones Index over the period 1890-2018. Using different statistical tests (both parametrical and non-parametrical) as well as additional technics like modified cumulative abnormal returns approach, regression analysis with dummy variables, R/S analysis and a trading simulation approach; four hypotheses were tested, which are (H1): the after one-day of abnormal returns specific price effects (momentum/ contrarian) do appear; (H2): the price effects after one-day of abnormal returns vary in time and evolve; (H3): the price effects after one-day of abnormal returns can be exploited to generate profits from trading; and (H4): the level of persistence in anomalies related data set differs from the normal data set persistence. The results suggest that price effects after one-day abnormal returns during the analyzed period tend to be rather unstable both from the position of their strength and direction (momentum or contrarian effect). Between the 1940s and the 1980s a strong momentum effect after a day of positive abnormal returns was present and it was exploitable for profit. However, after the 1980s this has since disappeared. Nowadays the after one-day of abnormal returns price effects in the US stock market are rather weak and do not generate profit opportunities. The results, therefore, are consistent with the Adaptive Market Hypothesis.

Keywords: Overreaction, Momentum Effect, Contrarian Effect, Abnormal Returns, Stock Market; Dow Jones Index

JEL Classification: G12, C63