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Paulo Sergio Ceretta and Alexandre Silva Da costa
''The Gap Effect on the Brazilian Exchange''
( 2017, Vol. 37 No.4 )
We spotted a market anomaly, related to the opening gap of three asset classes, the exchange rate, Bovespa blue chips and the Ibovespa, the major stock index in Brazil; and further investigated through algorithmic trading simulation to verify our initial hunch. Our assumption, that turned out to be correct, we called the Gap Effect, and it is that big slumps or spikes in the opening gap on the beginning of the trading day, tend to a reversal, or a significant come back in the first fifteen minutes of the trading day, creating great opportunities for intraday trading. Using a large dataset of tick-by-tick data, we found a pattern which can spot striking opportunities to develop algorithmic trading strategies (long or short), based on the early movements of a security. Moreover, we confirm through Data Panel with Thresholds that the larger is the opening gap (up or down), the larger is the chance to a price reversal in the early minutes of the trading day, just after the initial auction is over.
Keywords: Intraday, algorithmic trading, gap effect, thresholds, price reversals
Manuscript Received : Sep 11 2017 Manuscript Accepted : Nov 19 2017

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