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Question 1

What is a market anomaly

Answer 1

Something that would lead us to reject the hypothesis of market efficiency -

Question 2

What is data snooping / mining?

Answer 2

Data snooping/mining involves exhaustively searching datasets for statistically significant relationships. It can lead to false discoveries of anomalies that are due to chance and unlikely to persist. Researchers should look for an economic rationale behind potential anomalies and test them across large datasets and subperiods.

Question 3

Describe the January effect and its potential explanations.

Answer 3

The January effect is the tendency for stock returns, especially for small firms, to be abnormally high in the first few days of January. Potential explanations include tax-loss selling in December and window dressing by portfolio managers. However, the effect may not persist after adjusting for risk.

Question 4

What are some other calendar anomalies, and do they persist?

Answer 4

• turn-of-the-month effect (stock returns are higher in the days surrounding month end)
• the day-of-the-week effect (average Monday returns are negative)
• the weekend effect (positive Friday returns are followed by negative Monday returns)
• the holiday effect (pre-holiday returns are higher).

Question 5

Explain the overreaction and momentum anomalies.

Answer 5

Overreaction refers to the tendency for past losers (poor-performing stocks) to outperform past winners. Momentum is the tendency for recent winners to continue outperforming. Both contradict weak-form EMH, because they provide evidence of a profitable strategy based only on market data but some argue they reflect rational behavior or statistical artifacts.

Question 6

Describe the size and value effects.

Answer 6

The size effect suggested small-cap stocks outperform large-cap stocks.
The value effect suggests value stocks (lower P/E, lower M/B, high dividend yield) outperform growth stocks. The value effect challenges semi-strong EMH because the information necessary to classify stocks as value or growth is publicly available, but some attribute it to uncaptured risk

Question 7

What is the closed-end investment fund anomaly?

Answer 7

Closed-end funds sometimes trade at significant discounts or premiums to their net asset value (NAV), Such large discounts are an anomaly because, by arbitrage, the value of the pool of assets should be the same as the market price for closed-end shares.

Question 8

Explain the earnings announcement anomaly.

Answer 8

Stock prices don’t fully adjust to earnings surprises (unexpected earnings) immediately, leading to predictable post-announcement returns. This could be due to market inefficiency or mismeasurement of risk.

Question 9

What is the IPO anomaly?

Answer 9

Initial public offerings (IPOs) are often underpriced initially but tend to underperform in the long run, suggesting investor overreaction.

Question 10

What are the implications of anomalies for investors?

Answer 10

Most evidence suggests reported anomalies are not robust violations of market efficiency. Trying to exploit them is unlikely to be profitable in the long run. A well-diversified, fundamentally-driven investment strategy is generally recommended.