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

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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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Notes

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

  2. 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.

  3. 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).

  4. 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.

  5. 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.

  6. 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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Acknowledgements

We would like to thank Professor Stefan Wendt, Reykjavik University, Professor Marco Wilkens, Augsburg University and Professor Michael Breitner, Leibniz Universität Hannover, for helpful comments and suggestions. We further thank participants of the 2015 Annual Meeting of Financial Management Association, participants of the 2015 Annual Meeting of the Academy of the Financial Services, participants of the 2016 Annual Meeting of the Eastern Finance Association, participants of the 2016 Behavioural Finance Working Group Conference, participants of the 2016 Annual Meeting of German Operations Research Society, participants of the 2018 Annual Meeting of Eastern Finance Association and seminar participants at Bamberg University. Further, we would like to thank anonymous reviewers as well as Professor Markus Schmid as Editor of Financial Markets and Portfolio Management for their valuable comments and support.

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We do not receive any grants or funds for our paper. All remaining errors are our own.

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Authors and Affiliations

  1. Chair of Entrepreneurship, Finance and Digitalization, Andrássy University, Pollack Mihály tér 3, 1088, Budapest, Hungary

    Tim A. Herberger

  2. Department of Finance, Bamberg University, Bamberg, Germany

    Tim A. Herberger, Matthias Horn & Andreas Oehler

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  1. Tim A. Herberger
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  2. Matthias Horn
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Correspondence to Tim A. Herberger.

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Herberger, T.A., Horn, M. & Oehler, A. Are intraday reversal and momentum trading strategies feasible? An analysis for German blue chip stocks. Financ Mark Portf Manag 34, 179–197 (2020). https://doi.org/10.1007/s11408-020-00356-2

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