Coffee Traders' Forum - A Discussion about Coffee Futures Trading
Coffee Traders Discussion Forum
In this study of gaps they test the following hypotheses for yaers: 2000 - 2015
H1: Prices tend to rise after positive gaps;
H2: Prices tend to fall after negative gaps;
H3: Prices tend to rise before positive gaps;
H4: Prices tend to fall before negative gaps;
H5: Price gaps are short-lived;
H6: Returns around price gaps differ from normal ones.
And the conclusion from the study is:
In this paper, we have analysed price dynamics around gaps in various (stock, commodity and
FOREX) financial markets by testing six different hypotheses by means of appropriate statistical
methods. We find that in most cases there is no significant evidence of anomalous price behaviour
associated with the emergence of gaps that could be inconsistent with market efficiency. Further, in
the FOREX and commodity markets gaps usually appear after weekends; in less efficient markets (in
Russia) previous price dynamics signal the emergence of gaps.
The exception is FOREX, for which there is some evidence of abnormal returns around gaps,
which could indicate that this market is not efficient. A trading robot approach confirms that
there exist profitable strategies based on exploiting these anomalies. The probability of profitable
trading is higher than 60%, and these results are significantly different from the random ones.
Further investigation of these issues, for a wider set of markets, should be carried out in the future.