Intraday momentum and contrarian effects on the JSE - Investment ...

<strong>Intraday</strong> <strong>momentum</strong> <strong>and</strong> <strong>contrarian</strong> <strong>effects</strong> on the JSE
Table 9: Average holding period returns of short quintile portfolios using only stocks with bid-ask spread
below thresholds of 30, 20 <strong>and</strong> 10 basis points
Returns for ranking over the formation period are calculated from mid-quote prices while returns over the holding period are
calculated from bid-ask prices <strong>and</strong> are shown in basis points. The formation period is fixed at 1 hour <strong>and</strong> the holding period
varies from 1 to 5 hours.
Spread Holding
Quintile portfolio number
threshold Period (hrs)
1 2 3 4 5
1 -23,5 -15,6 -21,0 -20,0 -17,5
2 -19,5 -9,9 -19,4 -17,1 -16,8
30 bps 3 -20,5 -9,0 -17,8 -17,6 -14,0
4 -21,5 -7,1 -16,7 -17,1 -14,1
5 -21,2 -7,8 -19,3 -16,0 -14,6
1 -19,5 -11,5 -14,8 -16,3 -12,4
2 -15,6 -7,1 -10,7 -13,4 -10,0
20 bps 3 -14,6 -6,4 -10,3 -11,3 -6,8
4 -16,5 -4,2 -9,4 -13,2 -7,2
5 -15,7 -6,1 -12,4 -12,9 -7,1
1 -14,0 -8,4 -8,7 -15,4 -6,2
2 -15,4 -2,2 -5,0 -6,6 -6,7
10 bps 3 -13,1 -2,4 -3,6 -8,0 -4,7
4 -16,0 -1,4 -1,9 -9,4 -6,7
5 -16,6 -2,9 -9,5 -11,0 -3,0
Table 10: Average holding period returns of long <strong>and</strong> short quintile portfolios using only oracle selected
stocks
Returns for ranking over the formation period are calculated from mid-quote prices while returns over the holding period are
calculated from bid-ask prices <strong>and</strong> are shown in basis points. The formation period is fixed at 1 hour <strong>and</strong> the holding period
varies from 1 to 5 hours.
Oracle Holding
Quintile portfolio number
type Period (hrs)
1 2 3 4 5
1 44,4 37,9 35,1 40,4 42,4
2 57,9 47,6 49,1 53,6 61,3
Long 3 64,4 57,4 58,0 61,9 70,0
4 72,5 63,9 64,0 68,4 75,9
5 80,5 71,1 70,7 77,2 83,1
1 42,7 35,5 34,5 34,9 39,2
2 58,1 53,3 45,3 46,1 55,7
Short 3 66,1 63,9 53,2 52,7 64,2
4 70,8 67,4 62,0 61,5 70,9
5 75,9 78,1 68,2 65,9 79,4
5. CONCLUSION
We noted above that to be profitable under bid-ask
pricing returns with a long portfolio the end bid price
must be higher than the start ask price <strong>and</strong> in the case
of a short portfolio, the end ask price must be lower
than the start bid price. In essence there must be a
large enough up or down movement in the best prices
over the course of the holding period depending on
whether a long or a short portfolio is taken. A pertinent
question is whether this actually happens in the data
set <strong>and</strong> if so, whether these movements are frequent
<strong>and</strong> large enough to be worthwhile taking additional
transaction cost such as brokerage also into account.
To answer these questions, consider a long <strong>and</strong> a
short oracle day trader. At the start of a holding
period, the long oracle trader can predict correctly
whether or not the end bid price will be higher than the
start ask price for each stock. If his prediction is for
the higher outcome he includes the stock in his list of
stocks for a long quintile portfolio following ranking by
the formation period returns. Similarly, at the start of a
holding period, the short oracle trader can predict
correctly whether or not the end ask price will be lower
than the start bid price for each stock. If her prediction
is for the lower outcome she includes the stock in her
list of stocks for a short quintile portfolio following
ranking by the formation period returns. If these two
oracle traders cannot trade profitably in the context in
which we are working then no one else without access
to their foresights will be able to do so either.
Table 10 shows the average returns achieved by the
long <strong>and</strong> short oracle traders when the formation
period was 9:15 to 10:15 <strong>and</strong> the durations of the
holding period varied from 1 to 5 hours as before. In
both cases the average returns were positive <strong>and</strong> the
longer the holding period the better the results. With
the 5 hours long holding period the returns are about
80 basis points. This would be sufficient to cover
brokerage rates of up to about 40 basis points to stay
58 Investment Analysts Journal – No. 70 2009