Objective: To understand 1) the meaning and implications behind anomaly and market efficiency and 2) the latest research and practical challenges of financialtheory and practicethrough the surveyof...

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Answered Same DayDec 21, 2021

Answer To: Objective: To understand 1) the meaning and implications behind anomaly and market efficiency and 2)...

David answered on Dec 21 2021
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Introduction:
The market efficiency suggests that markets are rational and the price of securities reflect
according to all available information. The investors take actions timely and price of securities
quickly adjust according to the new information. Thus, investors cannot beat the market in order
to generating abnormal ret
urn. But it is predicated that many stock markets are not following the
rule of Market Efficiency Hypothesis. The function of stock markets is different than the rule of
market efficiency and this deviation is called anomalies. The anomalies could occur once and
disappear or it could be occur repeatedly. This paper discusses the occurrence of anomalies with
evidences from the US stock exchange. The market anomalies are in the smooth pattern of stock
market and it exits in different stock exchanges of the world (Ariel 1984).
Financial Market Anomalies:
The anomaly can be said as an unusual occurrence. It is scientific and technical matters.
According to George & Elton (2001), “the market anomaly is defined as irregularities and
deviation from an exceptional condition, a surprise or unexpected phenomenon with respect to
the market theory such as efficiency of market and CAPM model”.
Anomalies are occurred once and disappear and some anomalies are occurring continuously. It is
a condition of inefficient market. According to the standard finance theory, “anomaly is a
condition under which the performances of stocks are different than the assumptions of efficient
market hypothesis”. Some events that cannot be explained by the efficient market theory are
called anomalies (Silver 2011). Fama (1970) noted the anomalies at the time of pointing out the
market efficiency, equilibrium and expected return. Their findings conclude the market
inefficiency and it is also an evidence of inadequacy of Asset-Pricing Model.
Effect on market efficiency:
The stock market anomalies effect the market efficiency because, it is opposite of the theory of
market efficiency. The market efficiency refers that the prices of securities reflect according to
the new information available to the investors. The efficient markets can be in three different
forms, in a weak form, all information is already reflected in the current prices of stocks or stock
prices moves randomly. Thus, in the weak form, no investor can beat the price of securities and
can get abnormal return. In the semi strong form of market efficiency, investors cannot make
abnormal profit on the basis of fundamental analysis. In the strong form of market efficiency, the
stock prices are fully reflected by the all information available thus, no one can beat the prices
even by insider trading. Some evidences of market anomalies are as under:
The Momentum Effect:
According to the study of momentum effect, the investors can gain abnormal return by using the
strategy of momentum effect. They sell the past loser stocks and buy the past gainer stocks
(Hons & Tonks 2001). Hons and Tonks observed that past gainer stocks’ returns are higher than
the past loser’s stocks because, the past gainer stocks are risky than past loser stocks. It is a
positive correlative strategy only for a short-period of time. The momentum effects can be seen
especially in January because of buying...
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