Behavioral Anomalies & Market Patterns
What are Anomalies?
Definition: Patterns in returns that contradict Efficient Market Hypothesis.
Significance: Suggest markets aren't perfectly efficient; behavioral biases create exploitable patterns.
Calendar Anomalies
January Effect: Abnormal returns in January (especially small caps)
- Cause: Tax-loss selling in December + optimism at year-start
- Magnitude: ~2-5% extra return
Weekend Effect: Monday returns often negative
- Cause: Bad news released after Friday close
Turn-of-Month Effect: Last trading day + first 3 days outperform
Size & Value Anomalies
Size Effect: Small caps outperform large caps historically
- Behavioral Explanation: Neglect (institutions ignore), overreaction to bad news
Value Premium: Low P/E, low P/B stocks outperform
- Behavioral Explanation: Overreaction to bad news creates bargains
Growth Trap: High P/E "glamour" stocks underperform
- Behavioral Explanation: Overoptimism, extrapolating growth too far
Momentum & Reversal
Momentum (6-12 months): Past winners keep winning
- Cause: Underreaction (conservatism bias)
Long-term Reversal (3-5 years): Past winners become losers
- Cause: Overreaction + mean reversion
Other Anomalies
IPO Underpricing: Average 15-20% first-day pop
- Cause: Underwriter conservatism, winner's curse
Post-Earnings Announcement Drift: Prices drift after earnings surprises for months
- Cause: Underreaction to earnings information
Closed-End Fund Discount: Trade 10-20% below NAV
- Cause: Sentiment of retail investors (who dominate closed-end funds)
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