STOCK MARKET ANOMALIES

Stock Market Anomalies and Market Inefficiency

Stock Market Anomalies and Market Inefficiency

Introduction

The main purpose of this paper is to make an analysis on the stock market anomalies and the market efficiency. This paper makes an analysis on the extent to which the stock market anomalies are evidence of market inefficiency. Since few years, there there are many growing body of evidences that lead to the development of new doubts about the informational efficiency of stock markets. These evidences were in the form of abnormal returns to the portfolios. These portfolios have been developed on the basis of information retrieved from public (Ball, 1995, p. 79). Anomalies are considered to be the empirical results, which are not consistent with the developed theories of asset-pricing behaviour. This is an indication of the market inefficiency and the inadequacies which are lying in the asset-pricing model. Even though there are evidences showing the efficiency in the stock market, still many studies have been conducted and shown the long-term historical anomalies in the stock market which brings contradiction on the efficient market hypothesis. It is necessary for the investors who evaluate anomalies that they should keep in consideration the fact that there is a historical existence of them, but there is no guarantee about there future's presence. There are different factors like the transactions and the hidden costs which can prevent them from the outperformance in future.

Discussion

It is proved that the stock market anomalies are the biggest evidences of the market inefficiencies. Therefore, it is necessary for the investors that they should give much importance to the effects of tax in their taxable portfolios at the time of properly evaluating the stock strategies. There are two choices available to the researchers who discover anomalies or the styles which are used for the production of superior returns:

1) In order to discover the techniques, they should go public and try to explore the recognition

2) In order to gain the excess return, they should use the techniques

Financial market anomalies are considered to be a cross-sectional element which is used in the time-series patterns in security. These anomalies do not have the predictions by the central paradigm or theory. There are two approaches used for this assumption. First, in case of the misprice of the security, there will be occurrence of the corrections in the released information because, for new information it is necessary for the traders that they should re-examine this and their beliefs (Fama, 1993, p. 56).

Anomalies are considered to be the result of the shortfalls which have been occurred in the models which have been applied in order to test the market efficiency, instead of testing the inefficiency of market. There is a higher possibility of the increased number of calendar anomalies to exist in the market. There are many studies which have documented the January effect, showing the large positive rate of returns which have been occurred during the few trading days of the ...