Market Anomalies
Market anomalies contradict the market efficiency theory, which states that stock prices represent all market information and that it is nearly hard to predict prices and generate extraordinary gains. They highlight the presence of asset price flaws that create extraordinary profit opportunities (Schwert, 2003, p. 939). The market irregularities are examined more below.
The January Effect
The January Effect states that securities prices climb the most in January when compared to other months. That could be explained by investors selling securities that were losing money at the end of the year in order to take advantage of tax breaks. They later accumulate at the beginning that creates a demand in January which pushes the prices up.
Turn of the Month Anomaly
Turn of the month anomaly indicates that prices tend to be highest on the last day of the month followed by the first three days of the month. It is a calendar effect explained by major company announcements such as on dividends. News in the market create a risk and return expectation causing sporadic changes in prices.
Time of the Month Effect
Time of the month effect is seen where high returns are experienced in the first half of the month compared to the second half. It is due to high liquidity due to salaries coupled with announcements that create expectations. It is a time where the market is busy with buying and selling of securities.
Days of the Week
Days of the week shows that Fridays close with high returns compared to Mondays that exhibit abnormally low yields. The abnormality is as a result of leveraging at the end of the week given uncertainty in the new week. Mondays exhibit slow activity as people await new information and are hesitant to make hasty trading decisions.
The Weekend Effect
The weekend effect is related to the day of the week where prices tend to rise as the weekend approaches. It could be explained by different days between trading of securities and settlement (Zacks, 2011). When traders sell at the end of the week, they find themselves illiquid and unable to buy at the beginning creating a slow market.
Holiday Effect
Holiday effect shows that prices exhibit higher returns before holiday seasons such as Christmas (Zacks, 2011). It is explained as a calendar anomaly where traders ma cluster funds and make plans to make purchases right before the holiday increasing market activity. After the holiday's people are less liquid and unable to create a busy market lowering market returns.
Neglected Firm
Neglected firm speculates that companies that are not followed closely by analysts have higher yields. It is based on the higher risks associated with the companies due to low liquidity. They also tend to disseminate higher better quality information for decision making.
Size Effect
Size Effect highlights that smaller companies regarding capital tend to outperform larger companies but over the long term (Zacks, 2011). Small firms provide higher returns based on the risk associated with investing in them. They also have greater potential for growth compared to large firms that have reached the peak of productivity.
Earning Report Anomaly
Earning report anomaly purports that investors can benefit by trading immediately reports are announced (Zacks, 2011). It is as a result of the market being unable to absorb market information quickly. Therefore, those that come into the market first benefit more than those that try to understand the information then trade.
Reversals Anomaly
Reversals anomaly significances that securities change course over a year. Stocks that performed well in the prior year are outperformed in the next period. It is as a result of the market making well-performing securities expensive and therefore people shying away from them. Naturally, the security prices go down in the forthcoming period.
Low Book Value Effect
Low Book Value effect indicates that securities with lower prices compared to their book values outperform the market. It is based on the speculation that the stocks are cheaper and likely to attract more traders. Maximum benefits are however achieved on taking up huge portfolios as opposed to a single stock.
Dogs of the Dow
Dogs of the Dow speculates that investors could benefit from the selection of securities with specific attributes in the Dow Jones Average. Investors would select high yielding stocks with a combination of lowest yielding stocks. The stocks being held for a year would yield high returns as a result of the massive data mining and speculation in the market.
Neglected Stocks
Neglected stocks purport that stocks with low popularity produce higher yields. It is as a result of risk related to stocks that people may not understand. Those that partake them take up greater risk resulting in higher returns.
Work Cited
Schwert, G.W. Handbook Of The Economics Of Finance. 1st ed., Toronto, Ontario, Elsevier Science B.V., 2003.
Zacks, L. (2011). The handbook of equity market anomalies. 1st ed. Hoboken, N.J.: Wiley.
