Payday, Loans, finances

To determine whether there is ample opportunity to profit from the price move that follows an event, it is necessary to study the direction of the market move and the subsequent price changes that occur over the next few days. These lagged reactions are the results of market inefficiencies; it is unlikely that prices could immediately jump to the exact price that economic principles require, despite the Efficient Market Hypothesis. With large price shocks there is often an over- or underreaction that is corrected during the next few days. Sometimes prices jump one direction and immediately begin to go the other way until they have completely discounted the price shock.
Where there is an underreaction the prices move higher over the next few days; when there is an overreaction prices move lower. To decide whether a market is a candidate for event trading, you must study the pattern of moves following the reaction to news and decide whether:
1. The size of the average move is enough to generate a profit.
2. The returns are worth the risk of loss associated with these volatile events.
When studying these events, there may be a direct relationship between the size of the reaction and the type of pattern that follows. For example, a small reaction to news may be followed by a steady continuation of the direction of the price shock. If unemployment jumps by !/4% in a month, there should be a reaction by the government to stimulate job growth. The same initial reaction would occur if unemployment jumped by 1 full percent, but the number would be so unexpectedly large that it may be considered an error in which case it is not clear to what extent the government would respond. The market may overreact to a large shock but underreact to a small one. The only way to discover this is by testing these events.
Fundamental to understanding price shocks is that the shock is based on the difference between the expectations and the actual reported data, not just the reported dataThe market always discounts what it believes is its best guess at what the report will say., therefore, if bond prices rise in advance of an important unemployment report, we can say that the market expects unemployment to increase. If bond prices have moved up by 1/2% (equivalent yield) in expectation of a very bad report, and the report comes out neutral, then prices will drop sharply to offset the incorrect anticipation. When studying market reactions from historic records of economic data, you must have market expectations to find consistent results; without those values, the best approach is to work backward from the reaction to infer the accuracy of expectations.