Tuesday, September 10, 2019

A survey of one Financial Market Anomaly (e.g. The Momentum Effect and Essay

A survey of one Financial Market Anomaly (e.g. The Momentum Effect and Market Efficiency) - Essay Example Anomalies specify either market ineffectiveness or insufficiencies in the fundamental asset-pricing model. Contextually, market anomaly is regarded as a price and return miscalculation on financial market which appears to oppose ‘efficient market hypotheses’ (Schwert, 2002). This report is based on the survey of one financial market anomaly named ‘turn-of-the-year’ effect. The objective of the report is thus to recognise and describe the reasons for the occurrence of turn-of-the-year anomaly. Furthermore, the report also aims to understand how this anomaly influences the aspect of market efficiency. Definition of Turn-of-the-Year Anomaly The turn-of-the-year effect defines an outline of increased trading quantity and higher stock prices in the year end (i.e. last week of December) and in the beginning of year (i.e. the first two weeks of January). According to Keim (1983) & Reinganum (1983), majority of irregular revenues generated by small organisations hap pens during the first two weeks of January. This anomaly is recognised as turn-of-the-year effect. In this context, Roll (1983) had theorised that higher unpredictability of little capitalisation stocks cause substantial short term capital losses. Most of the investors hence desire to realise income tax before year end. This stress leads to more sales of stock in the end of year, resulting in substantial minimisation of prices of small capitalisation stocks (Schwert, 2002). Pattern of Turn-of-the-Year Anomaly The study of the Return on Investment (ROI) of US along with other key financial markets constantly discovered robust dissimilarities in stock yielding behaviour across the year. The following figure hereby illustrates the average ROI on monthly basis from 1927 to 2001 in the US: Source: (Stern School of Business, 2012) From the above figure, it can be observed that the returns on investment in January from 1927 to 2001 were considerably higher in the US in comparison to the re turn of other months. This pattern of returns can be observed in the first two weeks of January. To be stated, the turn of the year effect was much more noticeable for small organisations in comparison with big organisations (Stern School of Business, 2012). However, the turn-of-the-year anomaly was learnt to b only existing in those markets where individual income taxes are active. In the similar context, the pattern of the stock markets of Hong Kong did reveal a turn-of-the-year effect owing to the fact that there were no capital gains from taxes. Similarly, in China the capital gains on taxes are considered as uniform which does not offer any kind of inducement for investors during year ends. Thus, turn-of-the-year anomaly is hardly observed in China as well as in Hong Kong (Ji, 2008). Discovery of Turn-of-the-Year Anomaly The seasonal anomaly had been first identified by Sidney B. Watchel in the year 1942. Chronologically, in the year 1976, Rozeff & Kinney had documented the tur n-of-the-year effect in New York Stock Exchange (NYSE) for the first time. They had found that the average yield of

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