Return reversals and the compass rose: insights from high frequency options data

Thanos Verousis, Owain ap Gwilym

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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.
Original languageEnglish
Pages (from-to)883-896
Number of pages14
JournalThe European Journal of Finance
Issue number9-10
Early online date28 Feb 2011
Publication statusPublished - Nov 2011


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