Purpose Flashcards
What are SEASONAL anomalies?
- Monthly Seasonality - January is usually good time to buy in stockmarket Turn-of-the-year effect
- Daily Seasonality - average return of daily return is different across weekdays
- Weekend effect - Mondays are usually bad for stock market
- Intra-month Seasonality - it is probably to do with liquidity of the market, market does better firs week of the month than last week of the month.
What is stock market ANOMALIES ?
Traditionally CAPM explains the relationship between risk and return in a perfect capital market.
Ri = Rf + Bi (Rm-Rf) this is too simplistic
EMH is the next best market after perfect market. Price is approximately value. Market price is BLUE of the true Value
Up until 1980 evidences were basically strongly in favour, but since then plenty of contradiction evidences occurred and these are called stock market ANOMALIES
There are 2 types Market Anomalies, one is based on Firm characteristic, the other is based on Calendar or Seasonal effects (for instance good time to buy is in December, because January is usually bullish).
Stock Market Anomalies
This means actually some firm with certain characteristics can outperform the stock market
•Size Effect
•P/E effect - as an example take this characteristic, stock with high P/E tend to be overpriced than stock with low P/E, although this can be linked into overreaction which is possible explanation,
What it is actually saying is that there is another variable besides beta that explaining why one stock’s return is different than other stock. It contradicts the CAPM on one hand because another variable in the CAPM model, on the other hand it contradicts the EMH, because if this is absolutely true that there is no relationship between P/E ratio and risk, what this means is that people misjudging the information and overreacting, the fact that it is overreacting to the earnings announcement is a failure to EMH
- BV/MV effect
- Post earnings announcement drift based on accounting earnings
