Custom «Market Anomalies» Essay Paper Sample
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Anomalies are defined as the observed results that are always conflicting with the maintained theories in asset pricing behavior. The analysis aims at identifying whether the market anomaly is a is as a result of the pricing situation that is currently being commissioned by the by through research; and this will help the organization to determine whether the anomaly will be able to completely disappear, resurface or even articulate (Beechey, 2001). Thus providing the researcher with the opportunity of knowing the exact cause of the market anomaly; if it existed in the past or is as a result of statistical structures that tend to threaten the business main aim of facilitating the common ways in which the organization conducts its operations.
What are market anomalies?
Market anomaly also as market inefficiency factor that affects the prices and/or even distorts the return in the financial market that seems to contradict the efficient market hypothesis that is set in order to contend the and structure the running of a given region market operations.
There are several researches that have been conducted in the past in order to identify and conduct some market research on real cases and the causes of the market anomalies in the world today; in addition to why these problem cuts across all the sectors of the disciplines such as academic disciplines and how the research has resulted to the cumulative research in almost the whole century (Burton, 1987). The research also aims at checking and highlighting on the financial markets that seems to be in a state of crisis that will result to the research aims at ensuring that the past problems are completely eliminated, while the new solutions are solved in order to ensure that the problem doesn't come up in the future. This is by the use of a complete surveillance of the market changing trends; this will prevent a repeat of this in the future and at the same time providing the investors with the opportunity. This will ensure that they have to correct kind of information that helps them regulate the prices of the commodities in the market today (Schwert, 2003).
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There is one common hypothesis that has been used all along as a way in which the prices of commodities are evaluated. Thus providing the investors with the well monitored prices that will ensure that the investors and other stakeholders benefit from the trade the hypothesis that is commonly used is the Efficient Market Hypothesis.
Efficient is described as the extent at which an effort, money, time or any other resource is fully utilized in order to fulfill the intended task without any cases of wastage being reported or incurred by the concerned party (Fox, 2009). Therefore in this case we consider a market efficient when it provides all the stakeholders with easy access to information. This will ensure that the investors and shareholders with the opportunity to fully access any information that is available in the market. At the same time take full advantage of the free information and also consult and/ or discuss freely with other investors on the measures that will ensure that will improve the security prices in the market (Schwert, 2003).
Inefficient markets will provide the investors with limited access to information. This is where the investors will be denied the opportunity to freely access the information; thus affecting the rate of access of information to its normal service delivery (Singh, 2007). This is where the investors will conduct cost effective analysis that will be aimed at making the cost effective rational basic decisions.
What is Efficient Market Hypothesis?
Efficient Market Hypothesis is a theory that indicates that there is free access to information in the market; these current prices of the stocks will be fully reflected by the availability of information about the commodity in the firms. This ensures that the investors or business owners from earning excess profits that will be of greater advantage to the investors and exploiting the consumers (Beechey, 2001). Thus it provides the investors and the public with a fair opportunity that will ensure that they free room for discussion, information and price sharing. And it is classified into three different forms namely weak, semi-strong and strong form and in the following section we I am going to highlight on the different forms of Efficient Market Hypothesis and how they affect the pricing of the commodities in the markets.
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The weak form efficiency is where the prices of products can't be predicted only by analyzing the prices from the past; at the same time excess returns can't be easily earned at even after a long period of time based on the historical share prices or any other historical data. Technology will not also help in the predicting the future prices of the products (Burton, 1987). The share prices will not exhibit any serial dependencies, as there will be no definite pattern to the prices of the products.
It explains that the information that regards the future prices of the products will be as a result random ascending. This is because there is no information that is in record as pertaining to the pricing of the products and it should be noted that the price increases should not be in an equal equilibrium, and the price increase should not be benefiting the investors directly as it will result to "market inefficiency" (Clarke, 2008). Moreover this form of Efficient Market Hypothesis predicts that all the increases in the prices are random with many studies showing that there is a correlation between the degree of trending and the length of the time period studied to be ranging between weeks and months; the problems of algorithm which constitutes the pricing reflect all available information that have been studied (Singh, 2007).
Semi-strong form of efficiency is a type of Efficient Market Hypothesis that indicates that the share prices adjust due to the availability of new information that is sent or shared between the publics and the investors in a very fast manner and in an unbiased fashion. But in the process of sharing the information no excess information is returned or received in the process of trading of the information. This will automatically result to the information flow between these two parties thus resulting to the credibility between these different groups as it will expose each other to a discussion that will be aimed at ensuring that they come to a conclusive price discussion. Semi strong form efficiency will conduct unknown news that must be of a reasonable size that is instantly adjusted in order to be accessible to all the individuals in the business market and this will provide the investors with the opportunity of interpreting the changes in the markets (Burton, 1987).
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The third form of Efficient Market Hypothesis is the Strong- form efficiency this is where the share prices will reflect the information, public and private are restricted place and no one is able to access the information that is in the accounts. Thus the individuals are just trying to deal with the information that is provided to them thus monitoring the prices thus not benefiting the investors with a lot of increased margin (Clarke, 2008).
Causes of the market anomalies
The market anomalies is always encountered as a result of the fluctuation of prices in the market this is as a result of the consultation or no consultation of the customers and the investors and at the same time the monitor the previous rates in which the prices of these commodities were conducted and the information pertaining the changes of price is made public or even kept a secret from other investors and the public this are I attempts aimed at ensuring that the organization / investors aren't benefiting highly from the trade.
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There are several reasons that results to the market anomalies as I am going to discuses them in this section they include the following P/E effect, small-firm effect, neglected-firm effect, book-to-market effect and momentum effect.
The small-firm effect is a theory that states that all small organizations are at the advantage position of succeeding in the market as compared to the big and large organizations that are in a given location this will automatically provide the small organizations to succeed in these regions without a lot if problems that are encountered by the bigger organizations (Investopedia, 2011). In this case the small organizations will develop a lot of stress on the bigger organizations which will result to the organizations trying to manipulate the process of the commodities that they smaller organizations will aim at investing and this will automatically cause the organizations to raise the prices of there commodities thus making it insufficient for the organizations / investors to trade fairly this is because the bigger organizations frustrates the competitions of the smaller invertors as ways or restricting there performance or even forcing the organizations to quiet the field as they are causing a lot of unnecessary competition to them eventually resulting to the consumers paying a lot of money for good and services (Schwert, 2003).
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The other cause of market anomaly is the Neglected-firm effect; this is where the financial annalists ignore the existence of some Investors or organizations in the market , the limited information that is made available by these organizations will result to the organizations succeeding in the market as result of the neglection from the annalists this will provide the investors in these organizations are able to maximize on their profits without considering the consumers and services satisfaction (Crombez, 2001). This is especially the only way in which the organization can be able to acquire a lot of profits from its stocks as the investors don't share any information with the other investors or its customers thus resulting to the pricing of the of the products.
The other factor that affects the pricing in the markets and result to market anomalies is the Pricing-Earning effects (Fox, 2009). This is where organizations that have smaller stocks will eventually have higher returns in the end of the trade, this is basically because the financial analysts don't check at eh financial statements of these organizations and from the ignorance that these organizations receive (Clarke, 2008). These organizations end up getting a lot of returns they aren't expected to have acquire thus promoting market anomalies in these as very small organizations that aren't in the records aren't monitored in order to ensure that these organizations don't unfairly trade in the markets (Schwert, 2003).
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Book-To-Market (BTM) effect is another reason that affects or results to market anomaly; Book-To-Market (BTM) is where the company calculates the value of its assets, which is the net asset pre share to the prices of its shares on the markets. It is where a company where the company compares its asset value and price, and this will be used by the organization in determines the prices of its products in the market (Burton, 1987). That is when an organization has got the most expensive and high value of products it will tend to increase the prices of its shares to the public this is as a result of the organization as they are compared to the assets they posses this eventually affecting the market pricing of the products.
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The other cause of Market anomaly is Momentum effects this is described as the process of raising the prices of an asset in order to increase the prices of a product or even reducing of the prices of the assets in order to reduce the prices of the products and this is as a result of the investors manipulating the prices of these products in order to achieve the profits or even deny the other investors profits and this will ensure that the competitors are denied the opportunity of becoming more successful than them in the respective business field (Crombez, 2001).
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