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Abstract:
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Market efficiency hypothesis guides that markets are efficient and their prices are fully
representing all available information. Due to timely action of investors, prices of stocks
quickly adjust to the new information. So in this scenario no investor can get the abnormal
profits in the market. But sometimes we could found hurdles in many different stock exchanges
of the world that these markets are not following the EMH rules. The performance of these
stock markets deviates from the EMH rules. These Deviations are called anomalies. Anomalies
can occur once and disappear, or could occur repeatedly. This literature survey is going to
discuss the occurrence of many different types of calendar anomalies, technical anomalies and
fundamental anomalies with their evidences in different stock markets around the world. The
paper is also discussing the opinion of many different researchers about possible causes of
anomalies, how anomalies should be dealt? This issue is still a grey area of research.
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Introduction
This paper will shortly discuss market efficiency by Fama et al (1970) and market anomalies
with their evidences and causes. Efficient market hypothesis markets are rational and stock
prices are fully reflecting all possible available information. The prices of stock quickly adjust
new information. Furthermore we will categorize it into three categories: Calendar anomalies,
Fundamental anomalies and Technical anomalies; will explain existence and evidences as well
as possible causes of above mentioned anomalies.
EMH (Efficient Market Hypothesis) is traditional theory of finance. Fama et. al. 1970. defined
market efficiency as efficient market is a market where large number of individuals actively
competing with each other and trying to predict future market values of individual securities,
where all relevant information openly available to all investors. On the basis of relevant
information market is divided in three categories respectively; that are weak form, semi strong
form and strong form. In weak form of EMH all the historical prices and returns is already
reflected in the current prices of stock (Bodie et. al. 2007). Weak form of market is based on
random walk concept i.e. prices are moving randomly and no one can predict the future on the
basis of historical information and also not able to earn the abnormal profit. So at that time
technical analysis is of no use because analyst make chart of historical price movement of stock
predict future market prices. In semi strong form of EMH current prices reflect all publicly
available information as well as historical information. So no one can earn extra profit on the
bases of fundamental analysis (Bodie et. al. 2007). In strong form of EMH all relevant
information including past, public and private information is reflected in current prices. This
situation no one can earn abnormal profit not even by insider trading (Brealey et. al. 1999).
Although anomalies has vast field in efficient market but calendar anomaly has significant
among all. As it has relation with the time, season and occasion on particular date. There are
many researches available on it and we are making effort to contribute in it. Particularly in our
country several students conducted researches on it and taking data from the Business Recorder
or Karachi Stock Exchange. We are examining the market anomalies exist on Eid’s occasion
and also to find out consequences to find out the market trend. While examine the calendar
anomaly investor behavior has also play vital role on certain occasions. Behavioral finance
relates to the psyche of investors as well as it has role in financial decision making. This paper
belongs to theoretical discussion where calendar anomaly is considered to be independent
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variable and efficient market is dependent variable. Anomalies are defines as strange or
unusual occurrence. In financial markets, anomalies refer to situation when a security or group
of securities performs contrary to the notion of efficient market. Literary meaning non investing
world anomalies are strange or unusual occurrence. The word anomaly refers to scientific and
technological matters. It has been defined by George & Elton (2001) as irregularity or deviation
from natural order. Anomalies are the indicators of inefficient market. Some anomalies
happened once and disappear while others occur repeatedly. Financial market anomalies means
a situation in which performance of stock deviate from the assumptions of efficient market
hypothesis such movement or events which can’t be explained by using EMH are called market
anomalies (Silver, T., 2011). Generally there are three types of market anomalies are such as
calendar anomalies “Calendar anomalies are related to particular time period that is movement
in stock prices from year to year, month to month, day to day etc. these includes weekend effect
year end effect, turn of the month effect”. Fundamental anomalies are defined as such type of
anomaly “refers in trading financial instruments, and to the elements of fundamental analysis.
The basic principle of fundamental analysis refers to the fact that the market price of any
financial instrument is the result of supply and demand for that instrument”. Moreover it can be
further categories as Value anomaly “Value anomaly happens due to false prediction of
investors” (Graham, D. Cottle, 1962). Low price to book value “The stock having low price to
book ratio earn more return than the stock higher book to market ratio. (Fama, E. F., 1991).
High dividend yield “Stock with high dividend yield outperform the market and generate more
return if the yield is high than the stock generates more return (Fama, E. F. And k. R.
French,1988). Low price to Earning (P/E) “the stock with low price earnings ratio are likely to
generate more returns and outperform the market while the stock with high price to earnings
ratios tend to underperformed than the index”. Neglected stock is “the prior neglected stock
generates more return subsequently over the period of time. While the prior best performer
consequently underperformed than the index”( De Bondt & Thaler, 1985). Third type of market
anomaly is Technical anomalies and is define as “It involves the use number of analyzing
techniques to forecast future prices the bases of historical prices and relevant historical
information”. It commonly includes techniques like moving average and Reversal. However
moving average techniques is that in which buying and selling signals of stock are generated by
long period averages and short period averages. In this strategy buying stock when short period
averages raises over long period averages and stocks are sell out when short period averages
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falls below the long period averages Brock (W. Josef Lakonishok, et. al., 1992). Like moving
average reversal means that “the prices of the stock is unpredictable at one day it will be
touches the peak and in very next day it falls to ground. This phenomenon is called reversal.
Literature Review:
Literature review includes the hypothesis that is going to developed between calendar anomaly
and efficient market. As
Calendar Anomalies:
Calendar anomalies are related to particular time period that is movement in stock
prices from year to year, month to month, day to day etc. these includes weekend effect year
end effect, turn of the month effect
Week-end effect.
The stock prices are low on Monday, it means that the closing price is low than the
closing price of previous Friday Starks (M. S. L., 1986).
Year ended effect:
It means that increase in the prices of the stock in the last week of December and first
half of January.
Methodology:
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This part includes data collection techniques. Related data is collected through fundamentals
analysis such as from financial statements, insider source if available in the market along this
the data is also available on official site of business recorder and KSE. By analyzing the data
we can find out the calendar anomalies if any can exist or not and its relationship with that of
market efficiency.
Seasonal effect:
Seasonal evidence found in international markets, in Australian market OfficeR, R. R.
(1975) in Italian Tokyo stock exchange Ziemba, W. T. (1991). According to Yakob et al (2005)
there was seasonally effect in ten Asian pacific countries for period of January 2000 to march
2005. They founded that this period was the ideal period for examine this effect because of
stability and is not influence by financial crisis of late 90’s.
Monday effect:
Many evidence are present that insure the presence of weaken effect in United States,
Monday’s average return are found to be negative (Starks 1986).
Day of week effect:
This effect shows the difference in return the days of week, the findings have been lows
return on Monday and exceptionally high return on Friday than other days of week, Agarwal, A.
And k. Tendon (1994) found that out of 19 countries there are negative Monday return on
Monday return and negative Tuesday in eight countries, the Tuesday return are lower than
Monday return in these countries. This negative Monday and positive Friday effects are not
observed in Indian market. It was founded that Tuesday returns are negative in Indian markets,
while the Monday returns were significantly greater than other days. Agarwal, A. And k. Tendon
(1994) concluded in the findings that week effect is present in half of countries. But in other
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countries the lowest return are on the Tuesday.
Causes:
Trading on timing on study weekend effects shows that negative return on Monday is
due to non-trading period from Friday to Monday and that Monday returns are actually positive
Rogalski, R. J. (1984)
Month of the year effect- January effect:
This effect reflects variation in return of different months in year Gultekin, M. N. &
Gultekin N. B. (1983). This January effects is related to the size of firms small capitalization
firms outer perform than large capitalization.
Causes:
January returns are greatest due to yearend tax loss selling of shares disproportionally
Branch (1977). Ligon, j. A. (1997) found that January effect due to large liquidity in this
month. There are higher January volume and lower interest rates correlates with greater return
in January, Few countries are also exhibit positive December expects Hong Kong, Japan,
Korea, and china. Few countries exhibit positive January April and May effect and only
Indonesia exhibit negative august effect. January effect is due to tax loss saving at the end of
tax year ( Agarwal, A. & k. Tendon, 1994).
Year End effect:
According to Agarwal, A. And k. Tendon (1994) the possible reason of the year end effect is
attributed to window dressing and inventory adjustment by institutions and pension fund
managers.
Intra-monthly anomaly
Arial, R. A. (1987). observed monthly return in United States stock return. It was found that
stocks earn positive average return in beginning and first half of the month and zero average
return in second half of the month. Week monthly effect has been observed in many countries
Australia, USA & Canada showed same pattern as Ariel found in USA while Japan market had
trend of negative monthly effect. Australia and Canada had trend of positive monthly effects
while Japan market had negative monthly effects (Boudreaux*, D. O., 1995).
Turn of the month effect
According to this calendar anomaly the mean returns in early days of the month are higher than
other days of the month (Cadsby, C.B & M. Ratner, 1992). They reported turn of the month in
KSE of Pakistan and stated that turn of the month effect and time of the month effect is almost
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same. Turn of the month having large returns on last trading day of the month have been found
in fourteen countries (Agarwal, A. And k. Tendon, 1994).
According to Graham, D. Cottle. (1962). value strategies outperform the market. In value
strategies the stocks that have low price relative to come earning, dividend, historical prices are
buy out. The value stocks perform well with respect to growth stocks because of actual growth
rate are sales of growth stock or much lower than the value stocks. But market overestimates
the future growth of growth stocks (Lakonishok, j et. al., 2002). Individual investors make
overestimates because of two reasons. 1stly they make judgment errors and secondly they
mainly focus on past performance or growth although that growth rare is unlikely to persistent
in future.
It refers to that stocks with low P/E ratio earn large risk adjusted return than the high P/E ratio
the companies with low price to earnings are mostly undervalued because investors become
pessimistic about their returns after a bad series of earning or bad news.
A company with high price to earning tends to overvalued Thaler, w. F. M. D. B. R. (1984).
Numerous studies have supported this idea that high dividend yield stock outperforms the
market than the low dividend stocks. According to Yao et al (2006) stocks with high dividend
yield and low payout ratio outperform than the stocks with low dividend yield.
In 1970 the return were being measured in case if the market efficient by the joint test of EMH
and CAPM and the result were that there is a fair chances to earn the abnormal returns by using
the trading techniques and 1978 these were named as the anomalies by the journal of financial
economics.
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Kuhan (1996) says that the anomalies occur for the some specific group with which everything
was going right and now they have to face the crises during their experiments consistently
going wrong. Anomalies could be due to the fact that the social sciences fail to incorporate the
qualitative aspect of the phenomenon in combination to the quantitative aspect (Frankfurter&
MacGoun 2001). This fact is being also explained by the Kuhn (1996). The difference between
the market data and the assumption on which the theories are made is the anomaly. In short, the
difference of actual and the expected result of the market line theory is the anomaly.
The anomalies are very large that is enough to cause in the normal research and should be
resolved and if it is not that larger than it could be left and Kleidon, A. W. (1986) says that
there is need of change of disciplinary foundation for explanation of anomalies.
Kuhn, T. S. (1996) perceives anomalies as beneficial for the finance itself and says that though
most of the times the anomalies do not result in the discovery of something new but they do
break the existing paradigm thus causing in emergence or new theories
Another important aspect of anomalies was discussed by the Kuhn (1970) is about replacement
the paradigm. In science you need to have another paradigm to replace the existing paradigm
and if you don’t have then the rejecting the existing paradigm is rejecting the science itself.
There are hundreds of the anomalies existing but we don’t regard them until we have better one
to replace EMH (Laktos, I., 1970).
Conclusion:
As the efficient hypothesis defines efficient market is that where all the investors are well
informed about all relevant information about the stocks and they take action accordingly. Due
to their timely actions prices of stock quickly adjust to new information, and reflect all
available information. So no investor can beat the market by changing abnormal returns. In the
week form of efficient market technical analysis is useless. While in semi strong form, both the
technical and fundamental analysis is of no use. And is strong form of efficient market even the
insider trader cannot get abnormal return. But it is found in many stock exchanges or the world
that these markets are not following the rules of EMH. These deviations are called anomalies.
Anomalies may occur once and disappear or could occur repeatedly. From the study of
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anomalies we can conclude that investor can beat the market, and can generate abnormal
returns by fundamental, technical analysis, by analyzing the past performance of stocks and
insider trading. Secondly it can be seemed in Holy month of Ramadan Trading of stock is at
low or normal level and volume of transaction is low as most of the masses spend that time in
their religious activities and due to which they limit their market activities due to which
efficient market do not reflect and the volume of stock remains un traded. And these trade
activities were started after the end of Eid’s occasion and market trends moves towards normal
activities. All the data collected from Business recorder website and we have hit particular
fertilizer sector in Pakistan which show above mentioned result described before.
Calendar anomalies are due to deviation from normal behavior of stocks with respect to time.
There are different possible causes of these anomalies like new information is not adjusted
quickly, different tax treatments, cash flow adjustments and behavioral constraints of investors.
Another type is fundamental anomalies which include that prices of stocks are not fully
reflecting their intrinsic values. These include value versus growth anomaly dividend yield
anomaly, overreaction anomaly, price to earnings ratio anomaly. Technical anomalies are based
on upon past prices and trends of stocks.
Yet a lot of research is need about the causes of these anomalies because it is yet debatable.
References:
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eighteen Countries." Journal of International Money and Finance, 13, pp.83-106.
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