To What Extent are Stock Market Anomalies Evidence of Market Essay

To What Extent are Stock Market Anomalies Evidence of Market Inefficiency - test ExampleEugene Fama has taken the specific asset pricing present such as the APT (Asset price Theory and the CAPM (Capital Asset Prising Model) as the specimen paradigm. Since the stock prices of different firm over the grocery stores is different, i.e. the market observe for the riskier stocks are low providing higher rate of return and vice-versa but in a cross naval division market the inverse will be applicable. Thus based on the evaluation made by Fama we can analyse the factors responsible for the stock markets anomalies resulting from market inefficiency (Keim & Ziemba, 2000, pp.92-94) Momentum and Overreaction anomalies Through momentum of anomalies the short- bound human body of share pricing of the companies. According to the theory lead by Werner DeBondht and Richard Thaler the over reaction of investors to the public education is completely unnecessary as the stock prices are evaluated according to the past performance of the stock market which may non portray the true picture of the market information. Thus the stock prices with inflated or depressed pricing may result in realising good or bad information which cannot be depended upon. Through the implementation of the overreaction strategy the investors were suggested to buy the loser portfolios while selling off the winner portfolios. and again a contradiction arises related to the weak-form of efficiency of the securities tends to earn high returns not only in the short-term but also in the subsequent periods. However the existence of the momentum is rational not contradicting the market efficiency due to the fact that that the presence of shocks in the growth rates of the cash flows of the shareholders which is bring forth to the serial correlation that is not only short lived but also rational (McMillan, et al., 2011, p.contents). Inferences from long term returns According to the inferences drawn by Fam a is that the market efficiency of the market is based on the joint personate testing for the expected normal returns. The problem that arises with the expected normal return whose description provided for the systematic intention is incomplete related to the average returns during the testing period resulting in a bad-model problem. A bad model problem results in mean average subnormal return which tends to become the elevator cars (Cumulative Abnormal Returns) because of the mean associated with the CAR increases summing to the standard error. Constant pricing errors can be seen in the ARRs (Average of monthly abnormal returns) with the respective standard error. Bad simulate problems are the main reason behind the long-term buy and hold abnormal returns which results in the multiplication of the expected return problem related to the short-term return explanation. Problems related to modelling The problems related to the modelling of the bad-model are of two types the first is that the asset pricing model of any miscellany does not completely describe the expected return from the market. In a particular market is tilted towards the small stocks then in the calculation of the CAPM the risk adjustments made can project false returns. heretofore in the case of the true model where the deviation from the model are predicted a situation of spurious anomaly can arise after the risk adjustmen