A literature review on extreme price movements with reversal

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.