Predictable patterns after large stock price changes

Abstract

Momentum and contrarian trading strategies present challenges to the concept of efficient market theory. This paper investigates the profitability short-term trading strategies in Athens exchange stocks..Using a sample from ASE for the period of January 2000 to January 2005, we find statistically significant abnormal profit of momentum strategy for the daily-horizon. This paper has tested the profitability of momentum trading strategies in the Greek stock market. It did so by examining profits generated portfolios formed on a daily basis, based on historical returns. Returns from daily adjusted winner portfolios are positive ,significant and systematically above the market return. There is strong evidence of momentum effect over the “spot horizon”. Loser portfolios become “more losers” but the downward trend is subsidized during the last year of our observation period for both winners and losers portolios.. The preliminary result in this paper suggests further examination to investigate whether it’s feasible to implement a daily strategy after accounting for transaction costs and whether the results are related to factors such as crosssectional dispersion of returns, volume (liquidity), book to market ratio, and behavioural characteristics of assets previously known to be related to price continuation and reversals. This analysis is compulsory before we suggest inefficiencies in the Greek market.