Predictable patterns following large price changes and volume

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.

On Stock Return Patterns Following Large Monthly Price Movements: Empirical Evidence From India

“…They also showed that the risk-based explanations could not explain the evidenced reversals. Parthasarathy (2019) examined the reversal patterns following large price shocks using raw daily returns as the trigger and found support for the behavioural explanations. The study found that large price changes accompanied by low volume exhibited significant reversals over the following 20-day period and suggested significant economic profits.…”

“…Bremer and Sweeney (1991) used a novel approach, where stock returns exceeding a trigger value were included in the sample, unlike the earlier approach of ranking stocks based on their past returns. This approach was followed by Pritamani and Singhal (2001), Benou and Richie (2003), Himmelmann et al (2012) and Parthasarathy (2019).…”