115 CFA
File: Equity Investments - Reading 38 - 3. Market Pricing Anomalies

3. Market Pricing Anomalies

f. describe market anomalies;

What is a market anomaly?
A market anomaly is a security price distortion in the market that seems to contradict the efficient market hypothesis.

What is a calendar anomaly? What is the January anomaly?
- Calendar anomalies raise the question of whether some regularities exist in the rates of return during the calendar year that would allow investors to predict returns on stocks.
- The January anomaly, also called small-firm-in-January effect, says that many people sell stocks that have declined in price during the previous months to realize their capital losses before the end of the tax year.

What are Momentum and Overreaction Anomalies?
A study showed that stocks which have performed poorly in the past three to five years demonstrate superior performance over the next three to five years compared to stocks that have performed well in the past. The study provided evidence that abnormal excess returns could be gained by employing a strategy of buying past losers and selling short past winners, or the contrarian strategy.

What is the size-effect anomaly?
Some researchers found that small firms outperformed large firms after considering risk and transaction costs.

What is the value effect anomaly?
A study found that the risk-adjusted returns for stocks in the lowest P/E ratio quintile were superior to those in the highest P/E ratio quintile.

What three reasons might explain why closed-ended funds sell at discounts?
1. Agency costs - there are management fees from .5-2%
2. Taxes - gains must be realized when a fund realizes a capital gains at the end of its life
3. Liquidity - some argue that lack of liquidity causes valuation to drop

What is the cockroach theory of earnings announcements which cause the stock price to drift farther in the direction of good/bad than it should?
Cockroach theory is "when you find one, there are likely to be more in hiding." So the stock price will usually go a little farther than it should.

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