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In: Finance

1. The Super Bowl Indicator Theory suggests that the stock market will have a positive year...

1. The Super Bowl Indicator Theory suggests that the stock market will have a positive year if the team in the National Football Conference, or a team with an NFC origin, wins. If the American Football Conference team wins, the market will fall. According to the recent news (MarketWatch, 2/6/2017), it has accurately predicted the direction of the market for the year following 40 of the 50 Super Bowls since the first super bowl in 1967. Why do we have such phenomena? Is the finding consistent with market efficiency? Please discuss.

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Expert Solution

These phenomena in markets are known as anomalies which are treated as exception in the behavior of stock market. For examples the returns from the stock markets are high in January and low in December. These phenomena known as anomalies can be attributed to behavioral bias and not specific to a particular event. Efficient market hypothesis states that market prices reflect all the information about a stock but there are different forms of market hypothesis, weak form of efficiency, semi-strong form of efficiency and strong form of efficiency. Although it is believed that markets are efficient but the stock price of the company reflect the intrinsic value of the stock in the long term, in the short term there is too much volatility and stock price can deviate significantly from its intrinsic value of the stock. The finding which have been stated in the paragraph are treated as anomalies while explaining the behavior of stock market return such as returns in January are higher, after a positive news stocks price keeps on rising without any significant increase in earning or earning potential.


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