Large Price Changes Research Articles

Large Price Changes and Pervasive Non-Linearity in Financial Markets: Implications and Interpretations

We show that expected returns on US stocks and all major stock world market indices are non-linearly dependent on previous returns. The expected sign of returns tends to reverse after large price movements and trends tend to continue after small movements. This property can be captured by a simple polynomial model. Incorrectly fitting a simple linear model to the data leads to substantial bias in coefficient estimates and the polynomial model can be used to eliminate trends in the data. In addition, well known technical trading rules may be substantially driven by the non-linear behavior observed.

Asymmetry between Uptrend and Downtrend Identification: A Tale of Moving Average Trading Strategy

Most market participants are risk adverse and people tend to close their long positions once they perceive a formation of downturn in the market. Large sudden price drops can always be observed near the end of uptrends. On the other hand, people tend to have their own preferences in deciding the market entrance timings and large sudden price changes are relatively less commonly observed near the end of downtrends. Typical Moving Average strategies employ the same approach, using a single pair of time series, to locate the ending points of uptrends and downtrends. This approach does not consider the asymmetry of price changes near the end of uptrend and downtrend distinctively. To cater for the differences, a new approach using distinct pairs of time series for locating uptrends and downtrends is proposed.Performance of the proposed strategy is evaluated using stock market index series from 8 different developed countries including US, UK, Australia, Germany, Canada, Japan, Hong Kong and Singapore under 3 moving average calculation methods. The empirical results indicate that the proposed strategy outperforms the typical strategy and the buy-and-hold strategy. Recommended heuristics for selecting an appropriate MA length will also be addressed in this study.

Policy implications of considering pre-commitments in U.S. aggregate energy demand system

Linear approximations of the Generalized Almost Ideal Demand System and Almost Ideal Demand System for U.S. energy are compared to contrast the explicit inclusion and exclusion of pre-committed consumption levels. Results indicate that pre-commitment levels, the quantity of a good that is consumed in the short run with little regard for price, helps to better explain energy demand in the U.S. compared to the system that does not explicitly consider pre-commitments. Policy implications are if pre-commitments are a legitimate assumption, larger price changes are necessary to achieve a given policy objective than if there are no pre-commitments.

Response to Extreme Energy Price Changes: Evidence from Ukraine

Large but temporary price increases are sometimes deployed on days when the demand for electricity is extremely high due to exceptionally warm or cold weather. But what happens when the extreme price changes are permanent? Between January 2013 and April 2016, natural gas and electricity prices in Ukraine increased dramatically (up to 300% of the initial rates). We exploit variation in tariffs over time and across customers to estimate the price elasticity of electricity demand using a panel dataset with monthly meter readings from households in the city of Uzhhorod in Ukraine. We ask three research questions. First, what is the price elasticity of consumption implicit in the response (if any) to these large electricity price changes? Second, is there evidence of heterogeneity in the price elasticity of electricity demand driven by dwelling or household characteristics, or by consumer understanding of block pricing and/or own consumption levels? Third, how quickly do household adjust their consumption after a price change? Histograms of the monthly usage records suggest that our Ukrainian consumers were aware of the increasing block pricing system and responded to marginal prices, with bunching observed at the then-current as well as future block cutoffs. The price elasticity of electricity demand is approximately -0.2 to -0.5, with the bulk of our estimates around -0.3. The elasticity becomes up to 50% more pronounced over the first three months since prices change. We find only limited evidence that persons who are attentive about their consumption levels, their bills, or the tariffs are more responsive to the price changes. The tariff increases do help reduce CO2 emissions, but at a high cost per ton.

Trading and Fat Tails

Sudden, large price changes periodically occur in speculative markets. Many of these large price moves simply reflect the market’s reaction to new fundamental economic information-- as financial theory would predict. However, some of the most extreme price moves—often characterized (albeit incorrectly) as “Black Swans” in popular parlance--reflect more the predictable behavior of traders in certain situations or poorly designed market microstructures than the arrival of new fundamental information. These trading-induced price moves have important implications for practitioners, policymakers and academics alike.

On the relationship between conditional jump intensity and diffusive volatility

In standard options pricing models that include jump components to capture large price changes, the conditional jump intensity is typically specified as an increasing function of the diffusive volatility. We conduct model-free estimation and tests of the relationship between jump intensity and diffusive volatility. Simulation analysis confirms that the tests have power to reject the null hypothesis of no relationship if data are generated with the relationship. Applying the method to a few stock indexes and individual stocks, however, we find little evidence that jump intensity positively depends on diffusive volatility as a general property of the jump intensity. The findings of the paper give impetus to improving the specification of jump dynamics in options pricing models.

Return predictability following different drivers of large price changes

This study uniquely examines return predictability following different drivers of large price changes. We use several novel features of the Australian information generation environment to overcome identification issues of large price changes inherent in earlier studies. In contrast to prior results, we find that large price changes are permanent when they are driven by public information consistent with the semi-strong efficient markets hypothesis and also when driven by private information. For large price changes which do not correspond with information, we show that investors could profit from the subsequent over-reaction in returns.

Stock Returns Following Large Price Changes and News Releases – Evidence from Germany

Abstract/Zusammenfassung We revisit the overreaction hypothesis in the light of information effects. Using a sample period from 2005–2012 covering 2,542 large price changes in the German stock market, our results indicate that information effects can explain both overreaction and underreaction patterns. Specifically, we find that large positive price changes without public information signals are followed by short-term price reversals. In contrast, negative price shocks concurrent with a public announcement are associated by price continuations. The results are robust to size effects and sub-periods. Furthermore, we design a trading strategy to show that the observed return predictability could have been exploited for large negative price changes. Kursreaktionen auf grose Aktienkursanderungen – Eine empirische Untersuchung fur den deutschen Markt unter Berucksichtigung der Informationswirkung von Pressemeldungen In diesem Beitrag wird die Uberreaktionshypothese fur den deutschen Aktienmarkt vor dem Hinter...

Sudden transition from equilibrium stability to chaotic dynamics in a cautious tâtonnement model

Discrete time price adjustment processes may fail to converge and may exhibit periodic or even chaotic behavior. To avoid large price changes, a version of the discrete time tâtonnement process for reaching an equilibrium in a pure exchange economy based on a cautious updating of the prices has been proposed two decades ago. This modification leads to a one dimensional bimodal piecewise smooth map, for which we show analytically that degenerate bifurcations and border collision bifurcations play a fundamental role for the asymptotic behavior of the model.

Exploring Price Fluctuations in a Double Auction Market

Inspired by the analysis of the limit order book and order flows in the order-driven model of Chiarella et al. this paper conducts a dynamic analysis of a microstructure model and discusses the origin of price fluctuations. Agents are assumed to use either a fully fundamental-value reversion or a trend following strategy to form their expectation of future asset returns. Furthermore, the probability of changing strategies and the parameters for the strategy are chosen based on a fitness measure. In this way, the agents' strategy choices are better related to the evolution of the market. We also add a layer of intraday activity. This model can obtain the results of the original model, such as the impacts of the traders' strategy and the stylized facts. Furthermore, we exhibit many empirically observed features in both the intraday and the daily horizon. The results provide evidence that the agents' expectations and trading volume can generate large daily price changes and that intraday price fluctuations can be caused by large trading size or liquidity fluctuations in different conditions.

Quantifying Stock Return Distributions in Financial Markets.

Being able to quantify the probability of large price changes in stock markets is of crucial importance in understanding financial crises that affect the lives of people worldwide. Large changes in stock market prices can arise abruptly, within a matter of minutes, or develop across much longer time scales. Here, we analyze a dataset comprising the stocks forming the Dow Jones Industrial Average at a second by second resolution in the period from January 2008 to July 2010 in order to quantify the distribution of changes in market prices at a range of time scales. We find that the tails of the distributions of logarithmic price changes, or returns, exhibit power law decays for time scales ranging from 300 seconds to 3600 seconds. For larger time scales, we find that the distributions tails exhibit exponential decay. Our findings may inform the development of models of market behavior across varying time scales.

Sudden transition from equilibrium stability to chaotic dynamics in a cautious tâtonnement model

Tâtonnement processes are usually interpreted as auctions, where a fictitious agent sets the prices until an equilibrium is reached and the trades are made. The main purpose of such processes is to explain how an economy comes to its equilibrium. It is well known that discrete time price adjustment processes may fail to converge and may exhibit periodic or even chaotic behavior. To avoid large price changes, a version of the discrete time tâtonnement process for reaching an equilibrium in a pure exchange economy based on a cautious updating of the prices has been proposed two decades ago. This modification leads to a one dimensional bimodal piecewise smooth map, for which we show analytically that degenerate bifurcations and border collision bifurcations play a fundamental role for the asymptotic behavior of the model.

ECONOMETRIC EVIDENCE TO TARGET TACIT COLLUSION IN OLIGOPOLISTIC MARKETS

Tacit collusion may reduce welfare comparably to explicit collusion, but it remains mostly unaddressed by antitrust enforcement that greatly depends on evidence of explicit communication. We propose to target specific elements of firms' behavior that facilitate tacit collusion by providing quantitative evidence that links these actions to an anticompetitive market outcome. We apply our approach to incidents on the Italian gasoline market, where the market leader unilaterally announced its commitment to a policy of sticky pricing and large price changes that facilitated price alignment and coordination of price changes. Antitrust policy must distinguish such active promotion of a collusive strategy from passive, best-response, alignment. Our results imply the necessity of stronger legal instruments that target unilateral conduct that aims at bringing about collusion.

Rural Policies, Price Change and Poverty in Tanzania: An Agricultural Household Model-Based Assessment

Exogenous shocks to farmers' consumption, production and labour market decisions are rarely considered accurately. For farm households, under labour market imperfections, such decisions are often interlinked. This calls for non-separable agricultural household models. According to this framework, second-order (or behavioural) effects include a direct (i.e., supply or demand reactions due to an exogenous shock) and an indirect (i.e., supply or demand adjustments to the endogenous variations in the shadow wage generated by the exogenous shock) component. Under large price changes or following structural interventions, such as those concerning land redistribution or mechanisation practices, neglecting such second-order effects on consumption and production can bias the final impact on household welfare. The main objective of this study is thus to develop a robust and comprehensive tool to evaluate the effect on household welfare of different agricultural policies in Tanzania and food price changes. A two-stage estimation strategy is adopted: the shadow price of labour is first estimated and then used to estimate production and demand systems as well as labour market functions. These models are subsequently used to simulate the effect on household welfare of a hypothetical 40% increase in the price of cereals and other crops and a hypothetical 10% increase in the hectares of arable land and in the use of ox-ploughs. The results are finally compared with the case in which a separable model is adopted.

Rural Policies and Poverty in Tanzania: An Agricultural Household Model-Based Assessment

Exogenous shocks to farmers’ consumption, production and labour market decisions are rarely considered accurately. For farm households, under labour market imperfections, such decisions are often interlinked. This calls for non-separable agricultural household models. According to this framework, second-order (or behavioural) effects include a direct (i.e., supply or demand reactions due to an exogenous shock) and an indirect (i.e., supply or demand adjustments to the endogenous variations in the shadow wage generated by the exogenous shock) component. Under large price changes or following structural interventions, such as those concerning land redistribution or mechanization practices, neglecting such second-order effects on consumption and production can bias the final impact on household welfare. The main objective of this study is thus to develop a robust and comprehensive tool to evaluate the effect on household welfare of different agricultural policies in Tanzania and food price changes. A two-stage estimation strategy is adopted: the shadow price of labour is first estimated and then used to estimate production and demand systems as well as labour market functions. These models are subsequently used to simulate the effect on household welfare of a hypothetical 40% increase in the price of cereals and other crops and a hypothetical 10% increase in the hectares of arable land and in the use of ox-ploughs. The results are finally compared with the case in which a separable model is adopted.

The informational role of individual investors in stock pricing: Evidence from large individual and small retail investors

Using a unique data set, we find that large individual investors are successful at picking stocks. Large individual investors' correlated trades can not only move synchronous stock prices but also positively predict future returns. More importantly, they tend to trade before major earnings announcements and large price changes. By contrast, small retail investors' correlated trades are inversely associated with synchronous and future stock returns, indicating that small retails are uninformed. The differential information content between large individuals and small retails highlights the need to classify individual investors according to their investment amount when examining their role in stock pricing.

Costly Information, Planning Complementarities and the Phillips Curve

Standard sticky information pricing models successfully capture the sluggish movement of aggregate prices in response to monetary policy shocks but fail at matching the magnitude and frequency of price changes at the micro level. This paper shows that in a setting where firms choose when to acquire costly information about different types of shocks, strategic complementarities in pricing generate planning complementarities. This results in firms optimally updating their information about monetary policy shocks less frequently than about idiosyncratic shocks. When calibrated to match frequent and large price changes observed in micro pricing data, the model is still capable of producing substantial non-neutralities. In addition, I use the model consistent Phillips curve and data from the Survey of Professional Forecasters to estimate the frequency at which firms update their information about monetary policy shocks. I find that the frequency of updating was higher in the 1970s compared to subsequent decades and hence conclude that monetary policy in the U.S. was relatively less effective prior to the 1980s.

Do securitized real estate markets jump? International evidence

We apply a jump GARCH model to daily returns of the ten largest international securitized real estate markets and investigate the sources of large price changes. We document, for the first time, evidence for jump dynamics across major international securitized real estate markets. Large price jumps exist during both crisis and non-crisis periods. There is also evidence that jump intensity over time across different markets is inversely related to the degree of economic and financial integration, yet the degree of political and social integration yields no additional explanatory power beyond these two factors.

Large Price Changes and Subsequent Returns

We investigate whether large stock price changes are associated with short-term reversals or momentum, conditional on the issuance of analyst price target or earnings forecast revisions immediately following these price changes. Our study provides evidence that prices of stocks exhibit momentum when analysts issue revisions after large price shocks, and suggests that the initial price changes were indeed based on new information. In contrast, when price changes are not followed by immediate analyst revisions, we document short-term reversals, indicating that the initial price shocks were likely caused by liquidity or noise traders. A trading strategy that is based on the direction of the price change and the existence of analyst revisions in the same direction earns significant abnormal monthly returns (over 1%).

Obesity and economic environments.

This review summarizes current understanding of economic factors during the obesity epidemic and dispels some widely held, but incorrect, beliefs. Rising obesity rates coincided with increases in leisure time (rather than increased work hours), increased fruit and vegetable availability (rather than a decline in healthier foods), and increased exercise uptake. As a share of disposable income, Americans now have the cheapest food available in history, which fueled the obesity epidemic. Weight gain was surprisingly similar across sociodemographic groups or geographic areas, rather than specific to some groups (at every point in time; however, there are clear disparities). It suggests that if one wants to understand the role of the environment in the obesity epidemic, one needs to understand changes over time affecting all groups, not differences between subgroups at a given time. Although economic and technological changes in the environment drove the obesity epidemic, the evidence for effective economic policies to prevent obesity remains limited. Taxes on foods with low nutritional value could nudge behavior toward healthier diets, as could subsidies/discounts for healthier foods. However, even a large price change for healthy foods could close only part of the gap between dietary guidelines and actual food consumption. Political support has been lacking for even moderate price interventions in the United States and this may continue until the role of environmental factors is accepted more widely. As opinion leaders, clinicians play an important role in shaping the understanding of the causes of obesity.