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The prevalence of price overreactions in the cryptocurrency market

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  • Borgards, Oliver
  • Czudaj, Robert L.

Abstract

This paper examines the prevalence of price overreactions for twelve cryptocurrencies compared to the US stock market. For this purpose, we implement a dynamic modeling approach to define and test for overreactions for interday and various intraday price levels. We find evidence that price overreactions are highly prevalent in the cryptocurrency market for all frequencies, strongly supporting the overreaction hypothesis. This result is largely comparable for cryptocurrency and stock markets despite the fact that both markets are fundamentally different. However, the returns of an overreaction trading strategy are significantly higher for cryptocurrencies due to larger overreactions as the most important factor for profitability. In addition, our results also show that negative overreactions are slightly more prevalent than positive overreactions.

Suggested Citation

  • Borgards, Oliver & Czudaj, Robert L., 2020. "The prevalence of price overreactions in the cryptocurrency market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:intfin:v:65:y:2020:i:c:s1042443120300780
    DOI: 10.1016/j.intfin.2020.101194
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    3. Lamia Kalai, 2022. "Time Varying Dependence in the Cryptocurrency Market and COVID 19 Panic Index: An Empirical Investigation," International Journal of Economics and Financial Issues, Econjournals, vol. 12(2), pages 37-51, March.
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    8. Nesrine Dardouri & Abdelkader Aguir & Mounir Smida, 2023. "The Effect of COVID-19 Transmission on Cryptocurrencies," Risks, MDPI, vol. 11(8), pages 1-12, July.
    9. Borgards, Oliver & Czudaj, Robert L. & Hoang, Thi Hong Van, 2021. "Price overreactions in the commodity futures market: An intraday analysis of the Covid-19 pandemic impact," Resources Policy, Elsevier, vol. 71(C).
    10. Almeida, José & Gonçalves, Tiago Cruz, 2023. "A systematic literature review of investor behavior in the cryptocurrency markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
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    More about this item

    Keywords

    Cryptocurrency; Overreaction; Mean reversion; Turning point; Stock market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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