Briefly explain the concept of market anomalies in Efficient Market Hypothesis; also provide reasons why they...
Briefly explain the concept of market anomalies in Efficient Market Hypothesis; also provide reasons why they do not disappear if markets are completely efficient. [4]
Homework Answers
Market anomalies are those factors which lead to higher returns than those predicted by efficient market hypothesis. For example, efficient market hypothesis suggests that all information is reflected in the price of a stock. However, depending on the liquidity of the stock and traded volumes, there could be a gap in the bid and ask prices and hence for a liquid stock the information is priced in but for an illiquid stock, there remains some scope of arbitrage. This is what is predicted by efficient market hypothesis.
These do not disappear as efficient market hypothesis do not take into account factors such as liquidity, size of the transaction and information assymetry between buyers and sellers.
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Briefly explain the concept of market anomalies in Efficient
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