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Market Anomalies

Efficient Market

A market in which security prices reflect all available information and adjust instantly to any new information. If the security markets are truly efficient, it is not possible for an investor consistently to outperform stock market averages such as the S&P 500 except by acquiring more risky securities. Significant evidence supports the premise that security markets are very efficient.

Market Anomalies

Bubbles and Market Efficiency

Market Anomalies

A market anomaly is a price and/or rate of return distortion on a financial market that seems to contradict the efficient market hypothesis.

Market Anomalies

  • Structural factors, such as unfair competition, lack of market transparency, regulatory actions, etc.
  • Behavioral biases by economic agents
  • Calendar effects, such as the January effect or Monday effect.

Monday effect - Apple

The Earnings Announcement Puzzle

The New-Issue Puzzle

Source: www.onvista.de

A situation in which prices for securities, especially stocks, rise far above their actual value.

dot-com-bubble

Source: www.azizonomics.com

Source: www.manager-magazin.de

Market Anomalies

and

Behavioral Finance

Behavioral Finance

Behavioral finance combines psychology and economics to explain why and how investors act and to analyze how that behavior affects the market.

Typical patterns of behavior

Overconfidence

With more information people get the feeling more than others to know and this confidence then leads to overconfidence. People take more risks and decisions are fast made.

Loss Aversion

In economics and decision theory, loss aversion refers to people's tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains.

Herding

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