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Extreme Events – Specimen Question A.6.1(b) – Answer/Hints

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Q. What sorts of circumstances (applying to what sorts of financial series) might lead to extreme movements that are not actually errors?

 

Examples of extreme movements that are not actually errors include:

 

-          Large price movements arising from one off market events such as take-over offers

 

-          Large price movements that reflect drops in value due to payment of dividends or coupons to investors

 

-          One-off movements that correspond to ‘new’ news being revealed about the investment (e.g. a fraud, an announcement of signing of a major contract or discovery of a mineral find, or some change in the tax position)

 

It is often difficult for anyone other than a market professional specialising in the relevant market area to spot whether such movements are ‘genuine’. Data providers often respond to this challenge by seeking data from a variety of sources and comparing them against each other. However, even this may not be fully robust. All the available data feeds may merely repeat the same ‘error’ coming from further upstream. If the apparent discrepancy is large enough then this can lead to review by the original data providers themselves and/or by the regulator (e.g. to see if there is some evidence of market abuse or other type of failure in market price formation).

 


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