IDEAS home Printed from https://ideas.repec.org/a/eee/beexfi/v38y2023ics2214635023000205.html
   My bibliography  Save this article

A literature review on extreme price movements with reversal

Author

Listed:
  • Steffen, Viktoria

Abstract

Extreme price movements with reversal (EPMRs) are positive or negative price patterns that reverse in a specific time period after the initial price change. Up to now, multiple types of EPMRs have formed, ranging from event-driven to trade imbalance-driven approaches, with numerous studies trying to explain this phenomenon. Although EPMRs have been studied for decades, the rise of the high frequency world has shed light on EPMRs with durations of a few minutes or seconds. This paper summarizes the literature on EPMRs, with a special focus on (mini) flash crashes. While high frequency traders are made responsible by numerous studies, evidence remains unclear.

Suggested Citation

  • Steffen, Viktoria, 2023. "A literature review on extreme price movements with reversal," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
  • Handle: RePEc:eee:beexfi:v:38:y:2023:i:c:s2214635023000205
    DOI: 10.1016/j.jbef.2023.100806
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S2214635023000205
    Download Restriction: no

    File URL: https://libkey.io/10.1016/j.jbef.2023.100806?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. repec:hal:wpspec:info:hdl:2441/f6h8764enu2lskk9p4oq9ig8k is not listed on IDEAS
    2. Didier SORNETTE & Susanne VON DER BECKE, 2011. "Crashes and High Frequency Trading," Swiss Finance Institute Research Paper Series 11-63, Swiss Finance Institute.
    3. Tobias Braun & Jonas A Fiegen & Daniel C Wagner & Sebastian M Krause & Thomas Guhr, 2018. "Impact and recovery process of mini flash crashes: An empirical study," PLOS ONE, Public Library of Science, vol. 13(5), pages 1-11, May.
    4. Neil Johnson & Guannan Zhao & Eric Hunsader & Jing Meng & Amith Ravindar & Spencer Carran & Brian Tivnan, 2012. "Financial black swans driven by ultrafast machine ecology," Papers 1202.1448, arXiv.org.
    5. Vladimir Filimonov & Didier Sornette, 2012. "Quantifying reflexivity in financial markets: towards a prediction of flash crashes," Papers 1201.3572, arXiv.org, revised Apr 2012.
    6. Sandrine Jacob Leal & Mauro Napoletano & Andrea Roventini & Giorgio Fagiolo, 2016. "Rock around the clock: An agent-based model of low- and high-frequency trading," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 49-76, March.
    7. Mehdian, Seyed & Nas, Tevfik & Perry, Mark J., 2008. "An examination of investor reaction to unexpected political and economic events in Turkey," Global Finance Journal, Elsevier, vol. 18(3), pages 337-350.
    8. Pritamani, Mahesh & Singal, Vijay, 2001. "Return predictability following large price changes and information releases," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 631-656, April.
    9. Albert J. Menkveld & Bart Zhou Yueshen, 2019. "The Flash Crash: A Cautionary Tale About Highly Fragmented Markets," Management Science, INFORMS, vol. 65(10), pages 4470-4488, October.
    10. Brown, Keith C. & Harlow, W. V. & Tinic, Seha M., 1988. "Risk aversion, uncertain information, and market efficiency," Journal of Financial Economics, Elsevier, vol. 22(2), pages 355-385, December.
    11. repec:hal:spmain:info:hdl:2441/f6h8764enu2lskk9p4oq9ig8k is not listed on IDEAS
    12. Anton Golub & John Keane & Ser-Huang Poon, 2012. "High Frequency Trading and Mini Flash Crashes," Papers 1211.6667, arXiv.org.
    13. Boulton, Thomas J. & Braga-Alves, Marcus V. & Kulchania, Manoj, 2014. "The flash crash: An examination of shareholder wealth and market quality," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 140-156.
    14. J. Dugast & T. Foucault, 2014. "False News, Informational Efficiency, and Price Reversals," Working papers 513, Banque de France.
    15. repec:bla:jfinan:v:59:y:2004:i:2:p:869-898 is not listed on IDEAS
    16. Breedon, Francis & Chen, Louisa & Ranaldo, Angelo & Vause, Nicholas, 2023. "Judgment day: Algorithmic trading around the Swiss franc cap removal," Journal of International Economics, Elsevier, vol. 140(C).
    17. De Bondt, Werner F M & Thaler, Richard, 1985. "Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    18. Lobe, Sebastian & Rieks, Johannes, 2011. "Short-term market overreaction on the Frankfurt stock exchange," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 113-123, May.
    19. Amini, Shima & Gebka, Bartosz & Hudson, Robert & Keasey, Kevin, 2013. "A review of the international literature on the short term predictability of stock prices conditional on large prior price changes: Microstructure, behavioral and risk related explanations," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 1-17.
    20. Bruce N. Lehmann, 1990. "Fads, Martingales, and Market Efficiency," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 1-28.
    21. Lee, Suzanne S. & Mykland, Per A., 2012. "Jumps in equilibrium prices and market microstructure noise," Journal of Econometrics, Elsevier, vol. 168(2), pages 396-406.
    22. Saar, Gideon, 2001. "Price Impact Asymmetry of Block Trades: An Institutional Trading Explanation," The Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1153-1181.
    23. David Easley & Marcos M. López de Prado & Maureen O'Hara, 2012. "Flow Toxicity and Liquidity in a High-frequency World," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1457-1493.
    24. Alzahrani, Ahmed A. & Gregoriou, Andros & Hudson, Robert, 2013. "Price impact of block trades in the Saudi stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 322-341.
    25. Andros Gregoriou, 2008. "The asymmetry of the price impact of block trades and the bid‐ask spread," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 35(2), pages 191-199, May.
    26. Vladimir Filimonov & Didier Sornette, 2012. "Quantifying Reflexivity in Financial Markets: Towards a Prediction of Flash Crashes," Swiss Finance Institute Research Paper Series 12-02, Swiss Finance Institute.
    27. Atkins, Allen B. & Dyl, Edward A., 1990. "Price Reversals, Bid-Ask Spreads, and Market Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(4), pages 535-547, December.
    28. repec:eme:mrn000:01409170410784185 is not listed on IDEAS
    29. Andersen, Torben G. & Bondarenko, Oleg, 2014. "VPIN and the flash crash," Journal of Financial Markets, Elsevier, vol. 17(C), pages 1-46.
    30. Prodromou, Tina & Westerholm, P. Joakim, 2022. "Are high frequency traders responsible for extreme price movements?," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 94-111.
    31. Kraus, Alan & Stoll, Hans R, 1972. "Price Impacts of Block Trading on the New York Stock Exchange," Journal of Finance, American Finance Association, vol. 27(3), pages 569-588, June.
    32. Ellul, Andrew & Jotikasthira, Chotibhak & Lundblad, Christian T., 2011. "Regulatory pressure and fire sales in the corporate bond market," Journal of Financial Economics, Elsevier, vol. 101(3), pages 596-620, September.
    33. Andersen, Torben G. & Bondarenko, Oleg, 2014. "Reflecting on the VPIN dispute," Journal of Financial Markets, Elsevier, vol. 17(C), pages 53-64.
    34. Easley, David, et al, 1996. "Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
    35. Boubaker, Sabri & Farag, Hisham & Nguyen, Duc Khuong, 2015. "Short-term overreaction to specific events: Evidence from an emerging market," Research in International Business and Finance, Elsevier, vol. 35(C), pages 153-165.
    36. Gao, Cheng & Mizrach, Bruce, 2016. "Market quality breakdowns in equities," Journal of Financial Markets, Elsevier, vol. 28(C), pages 1-23.
    37. Brogaard, Jonathan & Carrion, Allen & Moyaert, Thibaut & Riordan, Ryan & Shkilko, Andriy & Sokolov, Konstantin, 2018. "High frequency trading and extreme price movements," Journal of Financial Economics, Elsevier, vol. 128(2), pages 253-265.
    38. Breckenfelder, Johannes, 2020. "How does competition among high-frequency traders affect market liquidity?," Research Bulletin, European Central Bank, vol. 78.
    39. Chan, Louis K. C. & Lakonishok, Josef, 1993. "Institutional trades and intraday stock price behavior," Journal of Financial Economics, Elsevier, vol. 33(2), pages 173-199, April.
    40. Jon Danielsson & Hyun Song Shin & Jean-Pierre Zigrand, 2012. "Endogenous Extreme Events and the Dual Role of Prices," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 111-129, July.
    41. Cox, Don R & Peterson, David R, 1994. "Stock Returns Following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance," Journal of Finance, American Finance Association, vol. 49(1), pages 255-267, March.
    42. Didier SORNETTE & Susanne VON DER BECKE, 2011. "Crashes and High Frequency Trading," Swiss Finance Institute Research Paper Series 11-64, Swiss Finance Institute.
    43. Burch, Timothy R. & Emery, Douglas R. & Fuerst, Michael E., 2016. "Who Moves Markets in a Sudden Marketwide Crisis? Evidence from 9/11," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(2), pages 463-487, April.
    44. Andrei Kirilenko & Albert S. Kyle & Mehrdad Samadi & Tugkan Tuzun, 2017. "The Flash Crash: High-Frequency Trading in an Electronic Market," Journal of Finance, American Finance Association, vol. 72(3), pages 967-998, June.
    45. Andros Gregoriou, 2008. "The asymmetry of the price impact of block trades and the bid‐ask spread," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 35(2), pages 191-199, May.
    46. Bremer, Marc & Sweeney, Richard J, 1991. "The Reversal of Large Stock-Price Decreases," Journal of Finance, American Finance Association, vol. 46(2), pages 747-754, June.
    47. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
    48. Apostolos Dasilas & Stergios Leventis, 2013. "Corporate Governance, Dividend Status, Ownership Structure, and the Performance of Greek Seasoned Equity Offerings," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 20(3), pages 387-419, November.
    49. Tom McInish & James Upson & Robert A. Wood, 2014. "The Flash Crash: Trading Aggressiveness, Liquidity Supply, and the Impact of Intermarket Sweep Orders," The Financial Review, Eastern Finance Association, vol. 49(3), pages 481-509, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Piccoli, Pedro & Chaudhury, Mo & Souza, Alceu, 2017. "How do stocks react to extreme market events? Evidence from Brazil," Research in International Business and Finance, Elsevier, vol. 42(C), pages 275-284.
    2. Dyl, Edward A. & Yuksel, H. Zafer & Zaynutdinova, Gulnara R., 2019. "Price reversals and price continuations following large price movements," Journal of Business Research, Elsevier, vol. 95(C), pages 1-12.
    3. Floris Laly & Mikael Petitjean, 2020. "Mini flash crashes: Review, taxonomy and policy responses," Bulletin of Economic Research, Wiley Blackwell, vol. 72(3), pages 251-271, July.
    4. Paulin, James & Calinescu, Anisoara & Wooldridge, Michael, 2019. "Understanding flash crash contagion and systemic risk: A micro–macro agent-based approach," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 200-229.
    5. Andrey Kudryavtsev, 2021. "Stock Price Dynamics Surrounding Company-Specific Shocks," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 32-45.
    6. Savor, Pavel G., 2012. "Stock returns after major price shocks: The impact of information," Journal of Financial Economics, Elsevier, vol. 106(3), pages 635-659.
    7. Amini, Shima & Gebka, Bartosz & Hudson, Robert & Keasey, Kevin, 2013. "A review of the international literature on the short term predictability of stock prices conditional on large prior price changes: Microstructure, behavioral and risk related explanations," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 1-17.
    8. Plastun, Alex & Sibande, Xolani & Gupta, Rangan & Wohar, Mark E., 2021. "Evolution of price effects after one-day abnormal returns in the US stock market," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    9. Guglielmo Maria Caporale & Alex Plastun, 2018. "On the Frequency of Price Overreactions," CESifo Working Paper Series 7011, CESifo.
    10. Mazouz, Khelifa & Joseph, Nathan L. & Joulmer, Joulmer, 2009. "Stock price reaction following large one-day price changes: UK evidence," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1481-1493, August.
    11. Srikanth Parthasarathy & Kannadas Sendilvelu, 2022. "On Stock Return Patterns Following Large Monthly Price Movements: Empirical Evidence from India," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 249-268.
    12. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 27, July-Dece.
    13. Guglielmo Maria Caporale & Alex Plastun, 2020. "Momentum effects in the cryptocurrency market after one-day abnormal returns," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(3), pages 251-266, September.
    14. 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).
    15. Hudson, Robert S. & Gregoriou, Andros, 2015. "Calculating and comparing security returns is harder than you think: A comparison between logarithmic and simple returns," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 151-162.
    16. Boubaker, Sabri & Farag, Hisham & Nguyen, Duc Khuong, 2015. "Short-term overreaction to specific events: Evidence from an emerging market," Research in International Business and Finance, Elsevier, vol. 35(C), pages 153-165.
    17. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2018. "Short-Term Price Overreactions: Identification, Testing, Exploitation," Computational Economics, Springer;Society for Computational Economics, vol. 51(4), pages 913-940, April.
    18. repec:rfb:journl:v:09:y:2017:i:2:p:007-026 is not listed on IDEAS
    19. Oral Erdogan & Ari Yezegel, 2009. "The news of no news in stock markets," Quantitative Finance, Taylor & Francis Journals, vol. 9(8), pages 897-909.
    20. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 6-2015, January-A.
    21. Andrey Kudryavtsev, 2019. "Holiday Effect on Large Stock Price Changes," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 633-660, November.

    More about this item

    Keywords

    Extreme price movements; Price reversals; Flash crashes; Mini flash crashes;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G40 - Financial Economics - - Behavioral Finance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:beexfi:v:38:y:2023:i:c:s2214635023000205. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-behavioral-and-experimental-finance .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.