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Statistical Value vs Economic Value

June 1, 2011

On Tuesday, on the verge of a big gap up by the S&P 500, we came across this study which showed there is value for traders in fading gap ups. We crunched the numbers ourselves and came to the conclusion that shorting stock market gap ups is profitable in a statistically significant way, yet totally useless. Here are the numbers under 2 scenarios, using SPY data since inception in 1993:

1  – Short every gap up. Cover either when the gap is filled or if not, at the close.

% Profitable:  74
Avg Gain:  3bps
Count: 2530
Std: 66bps
t 2.6

2 – Short every gap up. Cover either when the gap is half filled or if not, at the close:

% Profitable:  85
Avg Gain: 3bps
Count: 2530
Std: 49bps
t 2.6

The data is robust and significant. But 3bps in profits is useless, as it would all be eaten up by commissions and slippage. That doesn’t mean there is not something useful about this data, just that basic stats on fading gaps is the start of the search for a good trade, not the end.

Categories: stocks
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