Anomaly is ‘deviation from the normal or abnormality’. Something unusual. Anomaly is the word that can be used in respect of any fundamental fact, rule, theory, model, hypothesis, etc. It is an exceptional condition which indicates inefficiency. For example, a dog breeder is breeding white dogs and the dog comes out to be of black color then, this black dog is an anomaly.
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Similarly, in the financial market, anomalies indicate the inefficiency in the functioning of the market. Usually, anomalies are consistent in nature but sometimes the anomaly may occur for once and then gets vanished.
Market anomalies refer to the situations or actions in which a stock or a group of stocks deviate from the regular notions of the efficient market taking the price of the stocks into main consideration.
Market Anomalies are broadly classified into:
- Fundamental Anomalies: It refers to the anomalies that occur to the elements of Fundamental Analysis. The principle of fundamental analysis states that the market price of any instrument is determined by demand and supply.
- Technical Anomalies: these are the anomalies which are related to the various tool and techniques used to forecast the future prices of stocks based on past prices and information. Usually, it is seen that when the market is weak, then the past prices and information are of no use for technical analysis. But still, some anomalies occur after all.
- Calendar Anomalies: Calendar Anomalies occur at particular times or on particular dates all over the year. It is the movement in prices of stock from day-to-day, month-to-month, year-to-year, etc.
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Now, here are the few market anomalies that tend to happen persistently in the stock market which intrigues many investors.
- January Effect: The January effect is also known as the turn of the year as it occurs in the ending week of December and the starting few weeks of January. It describes the pattern of increase in the volume of the trade which subsequently leads to greater share prices.
- Turn of the Month– Turn of the month is the pattern of rising the value of the stock on the last day of each trading month. It occurs in the last days of the current month continuing until the first 3 days of the next month.
- Weekend Effect- it is also called the Monday effect. It shows the tendency of stock price to close lower on Mondays than the closing price on the previous Friday.
- Holiday effect- It is also known as the Pre-holiday effect; it describes the urges for the stock market to get an increase on the final trading day before a Public holiday.
- Value Effect– This anomaly occurs when the prediction made by the investors seems to be false. The investors here underestimate and overestimate the future returns and earnings of companies.
- Moving Averages: It is the technique in which the average price is taken over a specific period of the time (short term and long term). Here the stocks are purchased when the short-term average price rises and vice versa.
Author- Disha Agrawal
About the author: Disha Agrawal is an Economics graduate and presently pursuing an MBA with a specialization in Financial Administration from the Prestige Institute of Management and Research, Indore. She is a keen learner and is intrigued by financial markets. She is committed to her work and strives for continuous improvement.