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Price overreactions in the cryptocurrency market

Guglielmo Maria Caporale (Brunel University London, Uxbridge, UK)
Alex Plastun (Sumy State University, Sumy, Ukraine)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 29 August 2019

Abstract

Purpose

The purpose of this paper is to examine price overreactions in the case of the following cryptocurrencies: bitcoin, litecoin, ripple and dash.

Design/methodology/approach

A number of parametric (t-test, ANOVA, regression analysis with dummy variables) and non-parametric (Mann–Whitney U-test) tests confirm the presence of price patterns after overreactions: the next day price changes in both directions are bigger than after “normal” days. A trading robot approach is then used to establish whether these statistical anomalies can be exploited to generate profits.

Findings

The results suggest that a strategy based on counter-movements after overreactions is not profitable, whilst one based on inertia appears to be profitable but produces outcomes not statistically different from the random ones. Therefore, the overreactions detected in the cryptocurrency market do not give rise to exploitable profit opportunities (possibly because of transaction costs) and cannot be seen as evidence against the efficient market hypothesis (EMH).

Originality/value

The overreactions detected in the cryptocurrency market do not give rise to exploitable profit opportunities (possibly because of transaction costs) and cannot be seen as evidence against the EMH.

Keywords

Acknowledgements

Author Guglielmo Maria Caporale declares that he has no conflict of interest. Author Alex Plastun declares that he has no conflict of interest. This paper does not contain any studies with human participants performed by any of the authors. The second-named author gratefully acknowledges financial support from the Ministry of Education and Science of Ukraine (0117U003936).

Citation

Caporale, G.M. and Plastun, A. (2019), "Price overreactions in the cryptocurrency market", Journal of Economic Studies, Vol. 46 No. 5, pp. 1137-1155. https://doi.org/10.1108/JES-09-2018-0310

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited