Premium Essay

Capital Markets Investment and Finance

In: Business and Management

Submitted By anas93
Words 5201
Pages 21
Introduction:
Efficient Market Hypothesis (EMH) implies markets to be rational, incorporating new information to reflect in stock prices rapidly, considering direction and size of the share price movement. Consequently, leaving no opportunities for investors to beat the market and acquire abnormal returns. Predictable information raises the stock prices prior to its occurrence, and rapidly adjusting at the event date. Addendum to EMH, Random Walk Theory proposes market prices abide no pressure from past-price movements thus pursue a random course, making impossible to forecast future-price movements as they are an independent of past-prices. Fama (1970) establish three-level grading system portraying degree of market efficiency, based on investment approach endowing abnormal returns:

Market anomalies are inconsistent with EMH and a consequence of deviations and incomprehensible patterns in smooth running of stock markets. Anomalies are statistically considerable and additionally proffer investors with risk adjusted economic returns. Once documented and scrutinized in literature, anomalies tend to disappear, overturn, or attenuate; doubting their subsistence in past, as being statistical irregularity, or have been arbitraged away. This essay will begin by defining limitations of CAPM and introduce three-factor model. Additionally, it will discuss the fundamental anomalies (Value and Size effects), calendar anomalies (January, Weekend and Time-of-the-month effects) and Technical anomalies (Momentum and Reversal effects) in developed and emerging markets. Lastly, it will conclude if reliance over such effects would generate consistent abnormal returns or not.
CAPM and Fama and French:

Fundamental Anomalies:
Size Effect:
Banz (1981) and Reinganu (1981) illustrate an inverse relationship between security returns and market value of a

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