A Conversation On Equity Market Anomalies !!

"A deviation from the common rule, type, arrangement, or form" is an anomaly, says the thefreedictionary.com 

In this blog we will talk about some of the interesting research discoveries relating to patterns in stock market returns and prices !

One of the most popular anomalies that most of us have heard about is -

The January Effect 

It says that, the small cap stocks tend to give handsome return during the first few trading days of the new financial year compared to the large and mid cap stocks. The effect was first noticed by investment banker Sydney B.Watchtel around 1942. Although, this phenomenon is been observed since 1925, wherein most of the small cap stocks have outperformed the broader market in the first half of the January according to Keim B.Donald.

The effect is now less evident as markets have adjusted to it and it was more related to the US markets.  An attempt to check the impact of the same aspect in Indian markets, but the market returns did not longer demonstrating any significant predictable patterns.

Day effects

An unusual good performance by stocks on the day prior to market closing holidays was observed by researchers and weekends are considered to be bad for stocks as it is observed that companies and governments tend to release bad news on the weekends.

• The Monday Effect says, “ Don't sell your stocks on (blue) Monday” and that stocks tend to fall during the first forty five minutes of the trading day and then trade as any other day of the week.
  
• Daily returns are believed to be strong on Wednesday and Friday and prices tend to rise during the first forty five minutes and then trade flat.

Political Cycle Effect

Pattern of abnormally high annual returns during the third and last year of administration is observed in few countries by researchers. The reason attributed is that high returns in the period just above the next election makes the voters optimistic.

Spin off Anomaly

Spin off of smaller companies from larger organizations often lead to favorable stock market performance.

Stock Split Announcements

It is observed that stock split announcements have no effect on the market value of the firm. We may see a contrary where the price gets adjusted initially and there are cases where there is a significant increase in the market capitalization of the stocks after couple of years.

Thus, whenever inexplicable patterns of abnormal stock market returns are detected in empirical studies of a stock market, a return anomaly is said to be found. However, this is related to the efficiency of markets as described under Efficient Market Hypothesis. In a perfectly efficient market, good news results in a sharp upward spike in shareholders returns on the announcement day and bad news results in a downward spike on the announcement day.  In post announcement period, there should be no drift and returns are believed to be random in efficient markets.

There are many other studies questioning the validity and application of the above mentioned in various markets. The above mentioned is a crux of various empirical findings and it is for the reader to decide his course of action.