Return reversals and the compass rose: insights from high frequency options data

Thanos Verousis () and Owain ap Gwilym

The European Journal of Finance, 2011, vol. 17, issue 9-10, 883-896

Abstract: We study the occurrence and visibility of the compass rose pattern in high frequency data from individual equity options contracts. We show that the compass rose pattern in options contracts is more complex than portrayed in prior work with other asset classes. We find that the tick/volatility ratio proposed in prior studies gives inconclusive results on the pattern's visibility. A major contribution arises from linking the compass rose pattern with return reversals, which gives new insights into the pattern's predictability. We show that return reversals are revealed as an element of the compass rose pattern and are particularly evident at higher sampling frequencies. We study the determinants of these reversals and report that return reversals are primarily associated with high transaction frequency and decrease with the presence of additional market makers. Also, the hypothesis that there is a reaction to overnight events which is reflected in prices at the market open is not supported. Reversals are less prevalent for larger firms and when trade sizes are larger.

Date: 2011
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/1351847X.2010.538524 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:17:y:2011:i:9-10:p:883-896

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/1351847X.2010.538524

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().