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Financial Markets and Portfolio Management

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19-05-2020

Are intraday reversal and momentum trading strategies feasible? An analysis for German blue chip stocks

Authors: Tim A. Herberger, Matthias Horn, Andreas Oehler

Published in: Financial Markets and Portfolio Management | Issue 2/2020

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Abstract

The success of trading strategies that lead to abnormal excess returns based on annual/monthly investment periods has recently declined significantly. We adopt the original frameworks of De Bondt and Thaler (J Finance 40(3):793–808, 1985) and Jegadeesh and Titman (J Finance 48(1):65–91, 1993) to an intraday reversal as well as momentum strategy scheme based on 5-min stock returns. We analyze 16 reversal and momentum strategies each with ranking and holding periods of 60, 120, 180 or 300 min (reversal strategies) and 15, 30, 45 or 60 min (momentum strategies) from a retail investor’s perspective. We find no indications for momentum in stock prices but strong indications for reversals. Our results are furtherly robust regarding to market adjustment, portfolio sizes and skipping periods between ranking and holding periods. Our results show that the returns of the reversal strategies are statistically significant, however, yet too small to be economically significant. Our results also confirm the efficiency on the stock markets.

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We define market liquidity based on five determinants: tightness, depth, resilience, breadth and immediacy (Black 1971; Bagehot 1971; Kyle 1985; Sarr and Lybeck 2002).

The observation period in De Bondt and Thaler (1985) ran from 1926 to 1982. The observation period in Jegadeesh and Titman (1993) ran from 1965 to 1989.

We suppose a day-of-the week effect in case of reversal strategies and a trading hour effect in case of momentum strategies (Cross 1973; French 1980).

We also control for day effects in our reversal framework due to the existence of calendar effects and their influence on the success of reversal returns in the original framework (e.g., Chopra et al. 1992). We subdivided the week in the five common trading days. We do not find significant indications for a consistent pattern of day effects in our results. Therefore, we do not report these results in detail.

We also control for daytime effects in our momentum framework due to the existence of calendar effects and their influence on the success of momentum returns in the original framework (e.g., Glaser and Weber 2003). We subdivided the trading day in three two hour periods (9 am–10.59 am, 11 am–12.59 pm and 1 pm-2.59 pm) and one two and a half hour period (3 pm–5.30 pm). We do not find significant indications for a consistent pattern of daytime effects in our results. Therefore, we do not report these results in detail.

For standard orders of “High Volume” traders, see Deutsche Boerse (2019) as well as https://www.xetra.com/xetra-en/trading/trading-fees-and-charges.

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Title: Are intraday reversal and momentum trading strategies feasible? An analysis for German blue chip stocks
Authors: Tim A. Herberger
Matthias Horn
Andreas Oehler
Publication date: 19-05-2020
Publisher: Springer US
Published in: Financial Markets and Portfolio Management / Issue 2/2020
Print ISSN: 1934-4554
Electronic ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-020-00356-2

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