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--- name: adjusted-vs-unadjusted-price-series-pitfalls description: Audits historical price and volume series for corporate action discontinuities (splits/dividends) to prevent look-ahead bias and false signals in backtesting pipelines. domain: algorithmic-trading subdomain: backtesting-methodology tags: - backtesting-methodology - price-adjustment - stock-splits - dividends - data-integrity - look-ahead-bias brokers_frameworks: - Price Adjustment Auditor - Python version: "1.1.0" author: System license: MIT --- ## When to Use Invoke this skill when loading raw historical OHLCV data for backtesting. Mixing adjusted and unadjusted data, or using backward-adjusted dividend data, introduces severe look-ahead bias and false signals. A stock split in unadjusted data creates a phantom -50% price drop (triggering false momentum signals), while unadjusted volume breaks liquidity filters. ## Prerequisites - Historical OHLCV series. - Corporate action event log (splits, dividends). ## Workflow 1. **Discontinuity Detection**: Scan for overnight price jumps $\ge 30\%$. 2. **Volume Consistency Check**: If a split is detected, verify that the volume series was scaled inversely. (e.g., if price drops by half, volume must double to preserve notional traded). 3. **Adjustment Application**: - **Splits**: Apply backward-adjustment to both Price (divide by ratio) and Volume (multiply by ratio). - **Dividends**: Flag as cash-inflow events (Total Return) rather than backward-adjusting historical prices, which prevents look-ahead bias. ## Common Pitfalls - **Look-Ahead Bias via Dividends**: Using data where historical prices are backward-adjusted for dividends. This injects future yield information into past prices. - **Volume Neglect**: Adjusting price for a stock split but forgetting to multiply historical volume by the split ratio, breaking volume-weighted indicators. - **Double Adjustment**: Applying split factors to a series that the data vendor already adjusted. ## Verification Run the unit tests to verify that both price and volume are adjusted correctly, and that look-ahead bias warnings are generated for improper dividend handling. ## Related Skills - `backtest-determinism-and-reproducibility` - `corporate-action-adjusted-backtesting`