Return reversals and the compass rose: insights from high frequency options data
Varousis, Thanos Ap Gwilym, Owain
Varousis, Thanos
Ap Gwilym, Owain
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2011
Journal
The European Journal of Finance
Book
Publication Volume
17
Publication Issue
9-10
Publication Begin page
883
Publication End page
896
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Abstract
We study the occurrence and visibility of the compass rose pattern in high frequency data from individual equity options contracts. We show that the compass rose pattern in options contracts is more complex than portrayed in prior work with other asset classes. We find that the tick/volatility ratio proposed in prior studies gives inconclusive results on the pattern's visibility. A major contribution arises from linking the compass rose pattern with return reversals, which gives new insights into the pattern's predictability. We show that return reversals are revealed as an element of the compass rose pattern and are particularly evident at higher sampling frequencies. We study the determinants of these reversals and report that return reversals are primarily associated with high transaction frequency and decrease with the presence of additional market makers. Also, the hypothesis that there is a reaction to overnight events which is reflected in prices at the market open is not supported. Reversals are less prevalent for larger firms and when trade sizes are larger.
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Keywords
Compass Rose, High Frequency Data, Return Reversals, Equity Options