Question

Explain what each means as evidence for or against an efficient market.

a. An anomaly found.

b. An anomaly that you believe is actually a risk.

c. Data mining to find an anomaly

Answer 1

Ans:

A) An Anomaly found is against an efficient market, because in efficient market security prices are said to reflect all available information at any point of time. whereas, an anomaly is found when some privately held information is used by few holders of that information and they buy security by exploiting those private information. Hence, this behaviour goes against an efficient market.

B)  An Anomaly that you believe is actually at risk indicates the evidence for an efficient market. Because, the belief in this supports the price information in efficient market where all available information reflected in price. Hence, considering an anomaly as actual risk is an evidence for an efficient market.

C) Data mining to find an anomaly means as an evidence for an efficient market because data mining is an important tool to find out unusual or suspicious cases which are deviations from the norm within data that is mostly homogenous as in the efficient market.