Market anomaly

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A market anomaly (or market inefficiency) in a financial market is a price and/or rate of return distortion that seems to contradict the efficient-market hypothesis.[1][2]

Some of the main causes, why market anomalies happen, are structural factors such as unfair competition, lack of market transparency, regulatory actions, etc. Another explanation is presented by behavioral economics in the form of behavioral biases (cognitive bias, emotional bias, reflexive bias), conservatism (people are averse to new information and rely heavily on old beliefs) or overconfidence (investors overestimate their own abilities and make irrational choices).

Market anomalies can be calendar related (they appear periodically on given calendar events), fundamental and technical (they appear when trading using technical analysis).

Calendar anomalies[edit]

Weekend Effect[edit]

The returns on Mondays are expected to be lower than the rest of the week. The closing price of Monday is usually lower than the closing price of the preceding Friday and thus reporting negative returns over the weekend.

Turn-of-the-Month Effect[edit]

The stock prices are likely to increase on the last trading day of the month and the mean returns are usually higher in the early days of a month opposed to the rest of the days. The reason, why this anomaly occurs, is due to the mental behaviour of the investors, who sell their shares in anticipation of a positive change and new information in the coming month.[3]

Turn-of-the-Year Effect[edit]

The prices of stocks increase in the last week of December and on the first couple of weeks in January. This is caused by window-dressing, adjustment of inventories and anticipation of new information.[3]

January Effect[edit]

The January effect describes a phenomenon that stocks of small companies generate greater returns and outperform large firms in the first two to three weeks of January. Some of the reasoning behind this could be due to the yearend tax and therefore investors tend to sell their shares disproportionally creating an opportunity for higher returns in January as they acquire stocks again. another explanation shows that the liquidity in January exceeds the liquidity in other months.[3]

Fundamental anomalies[edit]

Value anomaly[edit]

Value anomaly occurs when investors overly estimate the future earnings and returns of growth stocks and underestimate the future returns and earnings of value stocks. This phenomenon arises when investors make judgement errors or they overly focus on the previous growth and hope for a similar performance in the future, even though it is unlikely. Another explanation of the overvaluation is that individuals prefer to earn a high return within the first few months rather than a persistent growth.[3]

Low Price-to-Book[edit]

The stocks with low price-to-book ratio generate more return than the stocks with high book-to-market ratio. This is a relatively weak anomaly, because it does not usually perform in the case of individual stocks and it takes very large portfolios of low price-to-book stocks to observe visible benefits.[3]

Low Price-to-Sales[edit]

Stocks with low price-to-sales ratio outperform the market and stocks with high price-to-sales ratios.[3]

Low Price-to-Earnings (P/E)[edit]

The stocks with low price-to-earnings ratio are likely generate more returns and outperform the market, because they are usually undervalued due to investors becoming pessimistic after a bad previous performance or negative news regarding the stock.

The stocks with high price-to-earnings ratios tend to underperform than the index due to an overvaluation of the asset.[3]

Volatility puzzle[edit]

In an efficient market with fully rational investors volatility should not be high, because prices would change only if new relevant information arises.

According to financial textbooks stocks with high volatility have greater risk associated with them, therefore they should have higher returns. this is usually not the case as they often register lower returns than low volatility stocks.

High Dividend Yield[edit]

The stocks with high dividend yield outperform the market and generate more return than stocks with low dividend yield.[3]

Size anomaly (Small-cap effect)[edit]

Small firms earn above-normal returns and tend to outperform larger firms. This occurs because firms with smaller market capitalization have more room to grow and thus grow more easily.

Neglected stocks[edit]

The prior neglected stocks generate more return subsequently over a period of time. While the prior best performers consequently underperform the index.

Technical anomalies[edit]

Technical anomalies can be observed when using technical analysis, which tries to predict future movements in financial markets using previous prices and relevant information. For efficient or partially efficient markets the technical analysis should not earn higher returns opposed to a conventional buy-and-hold investing strategy.

Moving Averages[edit]

A technique of technical analysis where investors focus on the long-term and short-term averages. Investors should buy, if the short-term average is above the long-term average, and sell if the short-term average falls below the long-term average.

Trading Range Break[edit]

Technical analysts believe that investors buy at the support level (a price level the stock/currency will probably not fall below) and sell at the resistance level (a price that will probably not be surpassed). The trading range break is a technical analysis strategy where investors buy if the price breaks the resistance level and sell if it falls below the support level.

Momentum Effect[edit]

The momentum trading argues that there is a short-run continuation of the previous trend. It shows that a portfolio consisting of previous "winners" (stocks that performed well in the past) tends to outperform a portfolio of prior "losers" (stock that performed poorly in the past). An explanation from a behavioral finance standpoint could be that investors tend overreact to private information and under-react to public information regarding a specific firm.

Long-run reversals[edit]

Stocks with high returns today have a tendency to perform poorly in the future and stocks with previously low returns tend to perform well in the future. Therefore if the price of a stock is too high or too low it may revert back to its mean price. Investors tend to overreact to recent information and price reflects excessive optimism or pessimism. Therefore if new information indicating a mean price reversion investors will more likely invest in previously poorly performing stocks.[4]


  1. ^ "Investor Home - Anomalies". Retrieved 2017-03-13.
  2. ^ "Investor Home - Anomalies". Retrieved 2017-03-13.
  3. ^ a b c d e f g h Latif, Madiha & Arshad, Shanza & Fatima, Mariam & Farooq, Samia. (2011). Market Efficiency, Market Anomalies, Causes, Evidences, and Some Behavioral Aspects of Market Anomalies. Research Journal of Finance and Accounting. 2.
  4. ^ Kok Sook Chinga, Qaiser Munira and Arsiah Bahrona (June 2014). "Technical Anomalies: A Theoretical Review". Malaysian Journal of Business and Economics.

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