Question

Briefly explain the concept of market anomalies in Efficient Market Hypothesis; also provide reasons why they do not disappear if markets are completely efficient. [4]

Answer 1

Efficient market hypothesis defines efficient market is that where all the investors are well informed about all the relevant information about the stocks and they take action accordingly. Due to their timely actions prices of stocks quickly adjust to the new information, and reflect all the available information. So no investor can beat the market by generating abnormal returns. In the weak form of efficient market technical analysis is useless, while in semi strong form, both the technical and fundamental analysis is of no use. And in strong form of efficient market even the insider trader cannot get abnormal return.

But it's found in several stock exchanges of the planet that these markets aren't following the principles of EMH. The functioning of those stock markets deviate from the principles of EMH. These deviations are called anomalies. Anomalies might occur once and disappear, or might occur repeatedly.While in customary finance theory, monetary market anomaly means that a scenario within which a performance of stock or a gaggle of stocks deviate from the assumptions of economical market hypotheses. Such movements or events which cannot be explained by using efficient market hypothesis are called financial market anomalies.Anomalies that are linked to a particular time are called calendar effects. Some of the most popular calendar effects include the weekend effect, the turn-of-the-month effect, the turn-of-the-year effect and the January effect.Not all anomalies are related to the time of week, month or year. Some are linked to the announcement of information regarding stock splits, earnings, and mergers and acquisitions.Examples are stock split effec,short term price drift etc.