Management Project-1

Final Presentation

TESTING FOR WEAK AND SEMI STRONG MARKET EFFICIENCY THROUGH

VARIOUS MARKET ANOMALIES

Prepared by
Anurag Sarkar (15A1HP095)

Prepared for
Prof. Dinesh Jaisinghani

Introduction
This

study provides empirical evidence on weak and semi-strong form

efficiency through analysis of occurrences of different types of calendar
anomalies, technical anomalies and fundamental anomalies with their
evidences in different stock markets around the world over a period
ranging from 2000 to 2016.

The

paper also discusses the opinion of different researchers about

the possible causes of anomalies, how anomalies should be dealt with,
and the behavioural aspects of anomalies. This issue is still a grey area
for research.

market

is considered weak form of efficient if current prices fully

reflect all information contained in historical prices.

market is semi strong efficient if stock prices instantaneously

reflect any new publicly available information.

Literature Review
Market

Efficiency, Market Anomalies, Causes, Evidences, and Some Behavioural Aspects of Market
Anomalies
-Madiha Latif*

Evidence

on Weak Form Efficiency and Day of the Week Effect in the Indian Stock Market
-SUNIL POSHAKWALE

An

empirical test of calendar anomalies for the Indian securities markets.

-Dinesh Jaisinghani

The

semi-strong efficiency of the Australian Share Market

-Nicolaas Groenewold

Informational

Efficiency of the Istambul Securities Exchange and some rationale for public

regulation
-Ercan Balaban
Weak

Form Efficiency in Indian Stock Markets

-Rakesh Gupta

Research Objective
To study empirical evidences on weak and semi-strong form
efficiency through analysis of occurrences of different types of
calendar anomalies, technical anomalies and fundamental
anomalies with their evidences in different stock markets around the
world over a period ranging from 2000 to 2016.

Design/methodology/approach
Empirical

/ Qualitative: Qualitative (Literature review studies)

Data

collection method: Secondary data collected from various

national indices sites, Bloomberg and various research literature

Sample

size: not applicable

Respondents:
Statistical

not applicable

techniques to be used: not applicable.

Study of Anomalies through

Literature
Calendar
Calendar

Anomalies

anomalies are related with particular time period i.e.

movement in stock prices from day to day, month to month, year
to year etc .these include weekend effect, turn of the month effect,
year-end effect etc (Karz 2011).

Calendar Anomalies
Calendar anomalies
Weekend Effect:

Turn-of-the-Month Effect:

Turn-of-the-Year Effect

January Effect:

Description

Study conducted and article

The stock prices are likely to fall on Monday.

Means the closing price of Monday is less
than the closing price of previous Friday.

Smirlock & Starks (1986)

The prices of stocks are likely to increase in

the last trading day of the following month,
and the first three days of next month.

Nosheen et al. (2007)

Agrawal & Tandon (1994)

This anomaly describes the increase in the

prices of stocks and trading volume of stock
exchange in the last week of December and
the first half month of January.

Agrawal & Tandon (1994)

The phenomenon of
Small-company stocks to generate more Keims (1983)
return than other asset classes and market in Chatterjee & Manaiam (1997)
the first two- three weeks of January is called

January effect.

Fundamental Anomalies
Fundamental

anomalies include Value anomalies and small cap

effect, Low Price to Book,high dividend yield, Low Price to Sales
(P/S),Low Price to Earnings (P/E) (Karz 2011).

Fundamental Anomalies
Fundamental anomaly

Value anomaly

Low Price to Book

High Dividend Yield

Low Price to Earnings (P/E)

Neglected Stocks

Description

Author

Value anomaly occurs due to false

prediction of investors. They overly Graham & Dodd (1934)
estimate the future earnings and
returns of
growth companies and
underestimate the future returns and
earnings of value companies
The stocks with low price to book
ratio generate more return than the
stocks having high book to market
ratio.
Stocks with high dividend yield
outperform the market and generate
more return. If the yield is high, then
the stock generates more return.
The stocks with low price to earnings
ratio are likely generate more returns
and outperform the market, while
the stocks with high
price to
earnings ratios tend to underperform
than the index.
The prior neglected stocks generate
more return subsequently over a
period of time. While the prior best
performers
consequently
underperform than the index.

Fama (1991)

Fama & French (1988)

Goodman & Peavy (1983)

De bondt & thaler (1985)

Technical Anomalies
"Technical

Analysis" includes analysing techniques use to forecast

future prices of stocks on the basis of past prices and relevant
past information.

Commonly

technical analysis use techniques including strategies like

resistance support, as well as moving averages.

Many

researchers like Bodie et al. (2016) have found that when the
market holds weak form efficiency, then prices already reflected
the past information and technical analysis is of no use.

So

the investor cannot beat the market by earning abnormal returns on

the basis of technical analysis and past information.

But

there are some anomalies that deviate from the findings of

these studies.

Technical Anomalies
Technical
anomaly
Moving
Averages

Trading
Range
Break

Description

Article

An important technique of technical analysis in which

buying and selling signals of stocks are generated by
long period averages and short period averages. In
this strategy buying stocks when short period
averages raises over long period averages and selling
the stocks when short period averages falls below the
long period averages.
This technique of technical analysis is based upon
resistance and support level. A buy signal is created
when the prices reaches at resistance level, which is
local maximum. As investor wants to sell at peak, this
selling pressure causes the resistance level to
breakout than previous level. This breaks out causes a
buy signal. A selling signal is created when prices
reaches the support level which is minimum price
level. Thus technical analysis recommends buying
when the prices raises above last peak and selling
when prices falls below last trough. But this strategy is
difficult to implement.

Brock(1992)
Josef (1992)
Lakonishok.etal.
(1992)

Brock(1992)
Josef (1992)
Lakonishok.et.al.
(1992)

Evidences of different types of

anomalies
Calendar

Anomalies and their evidence

Seasonal

effect

Seasonal influence is found in international markets, in Australian

market (Officer, 1975) in Italian & Tokyo stock exchange (Ziemba 1991).
According to Yakob et al. (2015) there were seasonality effects in ten
Asian pacific countries for period of January 2000 to march 2005 and
then again from 2013 to 2015
They founded that this period was ideal period to examine this effect
because of stability and is not influenced by financial crisis of 2007.

 Monday

effect

Many evidences are present that ensure the presence of weekend effect in
United States. Mondays average returns are found to be negative (Starks 1986).

Days-of-week

effect

The findings have been lowest returns on Monday and exceptionally high
return on Friday than other days of week.
There are mixed findings on it. Dubois & Louvet (1995) found that in European
countries, Hong Kong and Canada showed lower return for beginning of week
but not necessarily on Monday.
Negative Monday and positive Friday effects are not observed in Indian market
(Kumari 2009). It was founded that Tuesday returns are negative in Indian
markets, while the Monday returns were significantly greater than other days.
It was because of settlement period in India i.e. 14 days period that starts on
Monday and ends at Friday. Agrawal & Tendon (1994) concluded in the findings
that weekend effect is present in the half of the countries. While in the other
countries the lowest return are on the Tuesday.
Trading timing-On study on weekend effects shows that negative return on
Monday is due to non-trading period from Friday to Monday and that Monday
returns are actually positive (Rogalski 1984).

 Month

of the year effect January effect

This effect reflect variation in return of different months in a year (Gultekin &
Gultekin 1983).
This January effect is related to the size of firms small capitalization firms outperform
than large capitalization.
January returns are greatest due to year-end tax loss selling of shares disproportionally
(Branch 1977).
Ligon (1997) found that January effect is due to large liquidity in this month. There are
higher January volume and lower interest rates correlates with greater returns in January.
Rozeff & Kinney (1976) found that in New York exchange average return is 3.5% more
than other months.
The general argument is that January effect is due to tax-loss hypothesis investors sell in
December and buy back in January. Keong (2010) concluded that most of the Asian
markets exhibit positive December expect Hong Kong, Japan, Korea and China.

 Year-end

effect

According to Agrawal & Tandon (1994) the possible reason of the year end effect is attributed to
window-dressing and inventory adjustment by institutions and pension fund managers.

Intra

monthly anomaly

Ariel (2014) observed monthly return in United States stock index return. It was found that stocks
earn positive average return in beginning and first half of month and zero average
return in second half of month.
Weak monthly effects have been observed in foreign countries (Jaffe & Westerfield 1989).
Australia, United Kingdom and Canada showed same pattern as Ariel found in United States while
Japan had opposite effect.
Japan showed negative monthly effects (Boudreau, 1995).
According to Hensel (2011) cause of occurrence of higher short-term equity return anomalies i.e.,
Cash flow increased just after and before specific period causes anomalous return, behavioural
constraints as investors feeling and emotions that leads towards sale and purchase of specific
equities, timing constraints like delay in unfavourable reporting, and Slow reaction of market
towards new information

Fundamental anomalies with their

evidences
Value

versus growth anomaly

According to Graham & Dodd (1934) value strategies outperform the market.
In value strategies the stocks that have low price relative to earning,
dividend, historical prices are a buy out.
Individual investors overestimate because of two reasons. Firstly they make
judgment errors and secondly they mainly focus upon past performance or
growth although that growth rate is unlikely to persistent in future.
But institutional investors are free from judgmental error but they prefer
growth stocks because sponsor prefer these companies who outperformed in
past (Lakonishok 2002; Shleifer et al. 1992).
Another factor that why money managers prefer growth stock over value
stocks because of time horizon individuals prefer stocks that earn abnormal
return within few months rather than to wait for a month (Shleifer et al. 1993)

 Price

to earnings ratio anomaly

It proposes that stocks with low P/E ratio earn large risk adjusted
return than high P/E ratio because the companies with low price
to earnings are mostly undervalued because investors become
pessimistic about their returns after a bad series of earning or
bad news. A company with high price to earning tends to overvalued
(De bondt & thaler 1985).

Dividend

yield anomaly

Numerous studies have supported this idea that high dividend yield
stock outperforms the market than the low dividend yield stocks.
According to Yao et al (2006) stocks with high dividend yield and low payout ratio outperform than the stocks with low dividend yield.

 Overreaction

anomaly

Loser stocks overreact to market than winner stocks because

overreaction effect is much large for loser than winner stocks (De bondt
& thaler, 1985).

Ex-dividend
According

date anomaly

to Sabet et al Ex-dividend anomaly is characterized by

abnormal return on that date. They found evidence that there
is negative and non-significant return on ex-dividend date and
there is positive and significant return on day before the dividend
day payment.

Evidence on Technical
anomaly- Momentum Effect
Hons

& Tonks (2001) investigated the trading strategies such as momentum

effect in the US stock market and found that these momentum strategies are
present in the stock market in the period of 1977-1996.

According

to their study investors can gain the advantage by using the

momentum strategies. It is the positive autocorrelation in returns for a
short period of time and by buying past winners and selling past losers
they can gain the abnormal profits (Hons & Tonks 2001).

Portfolio

is formed by arranging the stocks returns in and ranking them. The top
ranked stocks are labelled as losers portfolio and the bottom are labelled as
winners portfolio. But these strategies generate profits only when asset
prices exhibit over-reaction.

Their

studies shows that returns on winners portfolio are greater than returns on
losers portfolio because the winners portfolio are more risky than the loser
portfolio.

Opinions of different researchers about the

possible causes of occurrence of anomalies
In

1970 the returns were being measured in case if the market is efficient by the joint
test of the EMH and CAPM and the results were that there is a fair chances to earn the
abnormal returns by using the trading techniques and in 1978 these were named as the
anomalies by the journal of financial economics.

In

the beginning the existence of the anomalies were being denied and wasnt
treat as the counter rather being perceived as the unexpected phenomenon, a
surprise and as an anomaly without the full explanation of the term (Kuhn 1977).

Kuhn

(1977) says that the anomalies occur for some specific group with which everything
was going right and now they have to face the crisis during their experiments consistently
going wrong.

While

Gentry (1975) says that the difference between the market data and the
assumption on which the theories are made is the anomaly.

Frankfurter

& McGoun (2001) proved that the word anomaly in start was being used as the
deviation from the AMH/CAPM but lately named as the BF (Fama, 1998) and thus
resulting in the rejection of the EMH/CAPM.

How Anomalies Should Be Dealt

With
The

anomalies large enough to cause the hindrance in the normal

research should be resolved and if it is not that large, then it could be
left (Ball 1978) and Kleidon (1987) says that there is the need of the change of
disciplinary foundation for the explanation of the anomalies.

Kuhn

(1977) perceives anomalies as beneficial for the finance itself and says
that though most of the times the anomalies do not result in the discovery of
something new but they do break the existing paradigm thus causing in the
emergence of the new theories.

There

are hundreds of the anomalies existing but we dont regard them

until we have a better one to replace EMH/CAPM (Lakatos 1970). In short
we can code Famas (1998) argument that until and unless behavioural
finance do not prove itself as a better theory from the EMH/CAPM, the
presence of anomalies cant shake the pillar of efficient market
hypothesis , no matter how many of them are being discovered.

Behavioural explanation of
anomalies
Failure

of different models based on rationale

Different

models have been given at different times but many of

them fail to explain the causes of the anomalous behaviour
of the assets. The three factor model of Fama & French (1993)
give a model for the analysis of the risk factors but Daniel &
Titman (1997) criticized the three factor model has no
explanation for the long term effect and the momentum
returns for the assets.

 Consider

the division of the investors proposed by Boudoukh et al (1994).

According

to Boudoukh et al. (1994), there are three schools of

thought giving the possible explanation of the financial market
anomalies: revisionists, loyalists and the heretics.

Revisionists

thought that markets are efficient and studied the

EMH with the time varying economic risk premium.

Loyalists

who also believe that the markets are efficient and

problems are due to the measurement errors in the data.

Heretics

have a completely different point of view and says that the

market is not rational rather they make decisions on the basis of
some psychological factors.

 Wouters

(2006) further categorized them into two groups; loyalist

and revisionists as the rationalists and heretics as the behaviourists.

the

rationalists as those who believe that the financial markets are

efficient and the abnormal returns are either by chance or due to
the common risk factors which are being ignored in the initial
analysis of stock returns.

the

behaviourists make their decisions on the basis of the sentiments.

The behaviourists are of the view that the all participants are not
required to be the rationales rather a small number is being
required which drive the whole market. This results in the mispricing
of securities and thus results in the market anomalies and the cause is
the sentiments of the investors.

Conclusion
Based

upon support and resistance level investors can buy and sell
stocks. Yet a lot of research is needed about the causes of these
anomalies because it is yet debatable.