Market Anomalies

Topics: Stock market, Fundamental analysis, Financial markets Pages: 14 (6471 words) Published: May 20, 2014
Research Journal of Finance and Accounting
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol 2, No 9/10, 2011

www.iiste.org

Market Efficiency, Market Anomalies, Causes, Evidences,
and Some Behavioral Aspects of Market Anomalies
Madiha Latif* Shanza Arshad,

Mariam Fatima,

Samia Farooq

Institute of Management Sciences Bahauddin Zakaria University, Multan, Pakistan Email: madihalmalik@yahoo.com
Abstract
Market efficiency hypothesis suggests that markets are rational and their prices fully reflect all available information. Due to the timely actions of investors prices of stocks quickly adjust to the new information, and reflect all the available information. So no investor can beat the market by generating abnormal returns. But it is found in many stock exchanges of the world that these markets are not following the rules of EMH. The functioning of these stock markets deviate from the rules of EMH. These deviations are called anomalies. Anomalies could occur once and disappear, or could occur repeatedly. This literature survey is of its own type that discusses the occurrence of different type of calendar anomalies, technical anomalies and fundamental anomalies with their evidences in different stock markets around the world. The paper also discusses the opinion of different researchers about the possible causes of anomalies, how anomalies should be dealt, and what ere the behavioral aspects of anomalies. This issue is still a grey area for research. Key Words: EMH, CAPM, Calender Anomalies, Technical Anomalies, Fundamental Anomalies. 1. Introduction:

According to efficient market hypothesis markets are rational and prices of stocks fully reflect all available information. The securities prices quickly adjust to new information as readily that information is available. But according to behavioral finance this kind of efficient market cannot explain the observed anomalies in Market anomalies are the unusual occurrence or abnormality in smooth pattern of stock market. Different researchers like Agrawal & Tendon (1994), Gultekin & Gultekin (1983), and Ariel (1984) exhibited the existence of observed anomalies with their evidences in different stock exchanges of world. But yet the evidences on anomalies are debatable. This review paper explains the market anomalies in both aspects: with respect to market efficiencies and as well as behavioral aspect. The 2nd section of paper will explain market efficiency, forms of market efficiency, fundamental and technical analysis. 3rd section defines market anomalies with three major types of anomalies. For the sake of convenience we divide the anomalies into three types i.e. Fundamental anomalies, technical anomalies and calendar anomilies.Section 4th will explain existence, evidences and possible causes of all of these types of anomalies. .While section 5th includes possible explanation of anomalies with the help of different models of finance. And the final section concludes the whole discussion.

2. Efficient Market Hypothesis
Efficient market hypothesis is one of the important paradigms of traditional finance theories. Fama (1970) defined efficient market as a market as a market with large numbers of rational profit maximizing individuals actively competing with each other and doing attempts to predict future market values of individual securities, and where all important relevant information is almost freely available to all investors.

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Research Journal of Finance and Accounting
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol 2, No 9/10, 2011

www.iiste.org

Fig.1Market reaction to surprising favorable event. Fig.2 Market reaction to predictable favorable event The Above figures shows the situation of market, in case of unpredictable event, if the market is efficient, stock prices immediately reflect effect of new event, but it will take some time for the prices to adjust new information, if the market is not efficient. While in the case of...

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