Price gap anomaly in the US stock market: The whole story |
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| Institution: | 1. Faculty of Economics and Management, Sumy State University, Sumy, Ukraine;2. Department of Economics, University of Pretoria, Pretoria, South Africa;3. Department of Economics, University of Pretoria, Pretoria, South Africa;4. College of Business Administration, University of Nebraska, USA;1. Department of Money and Banking, National Kaohsiung University of Science and Technology, Taiwan, ROC;2. Department of Finance, National Chung Hsing University, Taiwan, ROC;3. Department of Accounting, National Chengchi University, Taiwan, ROC;1. China Finance Research Institute, Southwestern University of Finance and Economics, Chengdu 610074, China;2. Western China Economic Research Center, Southwestern University of Finance and Economics, Chengdu 610074, China;3. Research Center for Central China Economic and Social Development, and School of Economics & Management, Nanchang University, 999 Xuefu Road, Nanchang 330031, China;1. Universitat de València, ERI-CES and Ivie, Spain;2. University of Birmingham, United Kingdom;3. Universitat Jaume I, IIDL and Ivie, Spain;1. School of Finance and Statistics, Hunan University, Changsha, China;2. School of Finance, Shanghai University of Finance and Economics, Shanghai, China;3. Shanghai Key Laboratory of Financial Information Technology, China |
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| Abstract: | This paper analyses the price gap anomaly in the US stock market (comprised of the DJI, S&P 500 and NASDAQ) covering the period 1928 to 2018. This paper aims to investigate whether or not price gaps create market inefficiencies. Price gaps occur when the current day’s opening price is different from the previous day’s closing price due orders placed before the opening of the market. Several hypotheses are tested using various statistical tests (Student’s t-test, ANOVA, Mann-Whitney test), regression analysis, and special methods, that is, the modified cumulative returns and the trading simulation approaches. We find strong evidence in favour of abnormal price movements after price gaps. We observe that during a gap day prices tend to change in the direction of the gap. A trading strategy based on this anomaly was efficient in that its results were not random, indicating that this market was not efficient. The momentum effect was found to be temporary and no evidence of seasonality in price gaps was found. Lastly, our results were also contrary to the myth that price gaps tend to get filled. |
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| Keywords: | Price gap anomaly Trading strategy Stock market Momentum effect Efficient market hypothesis |
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