Efficient Markets and Anomalies

Question 1

Anomaly that describes regular periodic patterns in returns

Answer 1

Seasonality

(e.g January-effect)

Question 2

Lo (1989) describes an element of predictability in stock returns.

The concept is known as serial _____

Answer 2

Serial correlation (autocorrelation)

Past returns are related to future returns

Question 3

Anomaly generated from buying previous (1-year) winners and selling (1-year) losers

Answer 3

Momentum

(Carhart, 1997)

Question 4

Anomaly generated from buying previous (1-month) losers and selling (1-month) winners

Answer 4

Short term reversals

(Fama, 1965; Jegadeesh, 1990; Jegadeesh & Titman, 1995b)

Question 5

Anomaly generated from buying previous (5-years) losers and selling (5-years) winners

Answer 5

Long term reversals

(DeBondt & Thaler, 1985)

Question 6

True or False?

Because the market is efficient, only a handful of stock market anomalies have been discovered

Answer 6

False

Hundreds of anomalies have been acknowledged in the literature. See wiki page on stock market anomalies.

Question 7

True or False?

Due to the market participant learning, stock market anomalies often have reduced out-of sample performance

Answer 7

True

(Mclean & Pontiff, 2016)

Question 8

Muth’s 1961 Rational Expectations describes ___

Answer 8

A model of market efficiency where the outcome of markets depends somewhat on what people expect to happen

Question 9

Names of 2 researchers who won a joint nobel prize for research into stock market efficiency

Answer 9

Eugene Fama
Robert Shiller