Predictable patterns following large price changes and volume

Srikanth Parthasarathy

Review of Behavioral Finance, 2019, vol. 11, issue 4, 393-405

Abstract: Purpose - The purpose of this paper is to examine the short horizon stock behavior following large price shocks in the Indian stock market. Design/methodology/approach - The author followed the methodology developed by Pritamani and Singhal (2001) to the short horizon stock behavior following large price shocks. Multivariate regression has also been used to test the robustness of the evidenced results. Findings - The abnormal return following large one-day price changes were not found to be important. However, large price one-day changes, conditioned with volume, evidenced significant reversals and momentum over the following 20-day period. Large price changes accompanied by low volume exhibited significant reversals and suggests significant economic profits. The large price changes accompanied by high volume exhibited continuations. Research limitations/implications - Large price changes accompanied by low volume exhibited significant reversals and suggested significant economic profits. The large price changes with high volume exhibited continuations. The contrarian strategy of buying low-volume one-day losers and selling one-day winners produced significant short horizon economic profits in the Indian stock market directly contradicting the efficient market hypothesis and has behavioral implications. Practical implications - In this paper, the author has unearthed significant simple profitable trading strategies based on reversals and continuation following large one-day price changes with potential for significant economic profits. Originality/value - This paper provides a practical framework for profitable trading strategies based on reversals and continuation following large one-day price changes with a potential for significant economic profits. The analysis of short horizon stock behavior following large price shocks conditional on volume based on the chosen methodology has not been attempted so far in the Indian stock market.

Keywords: Predictability; Momentum; Reversal; Underreaction; Overreaction (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:rbf-06-2018-0058

DOI: 10.1108/RBF-06-2018-0058

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