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Momentum Effects in the Cryptocurrency Market after One-Day Abnormal Returns

Last Updated on 10 February, 2024 by Rejaul Karim

Within “Momentum Effects in the Cryptocurrency Market after One-Day Abnormal Returns” by Guglielmo Maria Caporale and Alex Plastun, a comprehensive exploration is undertaken to ascertain the presence of momentum effects following one-day abnormal returns in the cryptocurrency market.

Focusing on the BitCoin, Ethereum, and LiteCoin exchange rates against the US dollar over a substantial period, the study scrutinizes hypotheses regarding intraday behavior, the existence of momentum effects on overreaction days, and the aftermath of one-day abnormal returns.

Employing an array of statistical methods and trading simulation approaches, the analysis yields compelling evidence that hourly returns during days of positive or negative overreactions significantly diverge from those on average days, and such overreaction days tend to generate exploitable profit opportunities with prices exhibiting momentum effects that persist into the following day.

Notably, the study also uncovers instances of contrarian effects, adding a layer of complexity to the dynamics of cryptocurrency market anomalies and momentum phenomena.

Abstract Of Paper

This paper examines whether there exists a momentum effect after one-day abnormal returns in the cryptocurrency market. For this purpose a number of hypotheses of interest are tested for the BitCoin, Ethereum and LiteCoin exchange rates vis-à-vis the US dollar over the period 01.01.2017-01.09.2019, specifically whether or not: H1) the intraday behaviour of hourly returns is different on overreaction days compared to normal days; H2) there is a momentum effect on overreaction days, and H3) after one-day abnormal returns. The methods used for the analysis include a number of statistical methods as well as a trading simulation approach. The results suggest that hourly returns during the day of positive/negative overreactions are significantly higher/lower than those during the average positive/negative day. Overreactions can usually be detected before the day ends by estimating specific timing parameters. Prices tend to move in the direction of the overreaction till the end of the day when it occurs, which implies the existence of a momentum effect on that day giving rise to exploitable profit opportunities. This effect (together with profit opportunities) is also observed on the following day. In two cases (BTCUSD positive overreactions and ETHUSD negative overreactions) a contrarian effect is detected instead.

Original paper – Download PDF

Here you can download the PDF and original paper of Momentum Effects in the Cryptocurrency Market after One-Day Abnormal Returns.

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Author

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)

Alex Plastun
Sumy State University

Conclusion

In conclusion, “Momentum Effects in the Cryptocurrency Market after One-Day Abnormal Returns” by Guglielmo Maria Caporale and Alex Plastun provides compelling insights into the dynamics of cryptocurrency markets following one-day abnormal returns.

The study’s rigorous analysis reveals distinct intraday behaviors during overreaction days, establishing a clear indication of exploitable profit opportunities as prices exhibit momentum effects that persist into the subsequent day.

This profound momentum effect not only underscores the potential for lucrative trading strategies but also sheds light on the complexities of cryptocurrency market anomalies. Furthermore, the emergence of contrarian effects in specific cases adds a layer of nuance to the findings, highlighting the intricacies of cryptocurrency market dynamics and the multifaceted nature of price patterns following abnormal returns.

Overall, the study contributes valuable knowledge that deepens our understanding of momentum phenomena and market anomalies in the cryptocurrency sphere.

Related Reading:

Constructing Cointegrated Cryptocurrency Portfolios for Statistical Arbitrage

Learning and Predictability via Technical Analysis: Evidence from Bitcoin and Stocks with Hard-to-Value Fundamentals

FAQ

Q1: What is the main focus of the research paper “Momentum Effects in the Cryptocurrency Market after One-Day Abnormal Returns” by Guglielmo Maria Caporale and Alex Plastun?

A1: The main focus of the research paper is to examine the presence of momentum effects in the cryptocurrency market following one-day abnormal returns. The study specifically explores hypotheses related to the intraday behavior of hourly returns on overreaction days compared to normal days, the existence of momentum effects on overreaction days, and the aftermath of one-day abnormal returns in the BitCoin, Ethereum, and LiteCoin exchange rates against the US dollar over a substantial period.

Q2: What statistical methods and approaches are employed in the analysis of the cryptocurrency market dynamics?

A2: The analysis utilizes a variety of statistical methods and a trading simulation approach. The statistical methods are employed to test hypotheses related to intraday behavior, momentum effects on overreaction days, and the impact of one-day abnormal returns. Additionally, a trading simulation approach is used to assess exploitable profit opportunities based on the observed dynamics of cryptocurrency prices following abnormal returns.

Q3: What are the key findings regarding intraday behavior and momentum effects on overreaction days in the cryptocurrency market?

A3: The results indicate that hourly returns during days of positive or negative overreactions significantly differ from those on average days. Specifically, the study finds that prices tend to exhibit momentum effects on the day of overreaction, creating exploitable profit opportunities. This momentum effect is observed not only on the day of the abnormal return but also persists into the following day. However, in specific cases (BTCUSD positive overreactions and ETHUSD negative overreactions), contrarian effects are detected instead.

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