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Unlocking Market Anomalies in Behavioral Finance and Economics

Discover groundbreaking research on market anomalies, behavioral finance, and economics as explored by renowned academics. Explore key studies challenging the Efficient Market Hypothesis and redefining investment strategies.

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Unlocking Market Anomalies in Behavioral Finance and Economics

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  1. Behavioral Finance Economics 437

  2. Announcements • Prof Burton speaking at noon at Farmington on Tuesday, April 22nd…. • Picnic at Prof Burton’s – Sunday, April 20th, near Foxfield, Noon to 3 PM • Next midterm is April 15th (Tuesday)

  3. So, where are we? • Fama-French, 1992 • Focus on BE/ME (and ME) • They conclude that there are unknown “risk” factors • Behavioralists conclude the EMH is false • DeBondt & Thaler, 1984 (“Mean Reversion”) • Based upon 5 year periods • Buy “losers” Sell “winners” • Earn 25 % net….mostly on the purchase of “losers” • Dubbed “overreaction” or “mean reversion” • Jagedeesh & Titman, 1993 (“Price” momentum) • 3 to 12 month periods • Buy “winners” Sell “losers • Average gain of “zero cost portfolio” is 1 % per month • Chordia & Shivumkar (Earnings momentum subsumes price momentum) • 9 percent per month • Negative January effect • Scott & Murillo “Rational Part of Momentum,” 2008 • “Informed investors” buy early • Prices “predict” future increases in fundamental value • Sadka on Liquidity • How is liquidity to be defined • Conclusion: liquidity is driving “momentum” • Kothari, Lewellen & Warner • Does momentum hold true in the aggregate • Point to “discount rate” changes as important

  4. Petkova & Zhang, “Is Value Riskier than Growth,” 2005 • Background • LSV argued that growth was actually riskier than value • Thus EMH is false • Petkova – Zhang say “no” • Use “expected market premium” as opposed to “actual market premium” • This reverses results • Time varying betas that are “pro-cyclical”

  5. Lewellen & Nagel, “Conditional CAPM does not explain anomalies”, 2006 • This argument is that beta can’t explain much of the returns from value stocks • Time varying betas in the wrong direction • Alpha’s positive, big and significant • Hence EMH is in trouble • Use actual “market premium” as opposed to the approach of Petkova Zhang, who use “expected market premium

  6. End

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