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Risk Measures in Asset Management Read chapter Read first chapter

2015 | OriginalPaper | Chapter

3. Stock Market Anomalies

Authors : Marcus Schulmerich, Yves-Michel Leporcher, Ching-Hwa Eu

Published in: Applied Asset and Risk Management

Publisher: Springer Berlin Heidelberg

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Abstract

This chapter provides a summary of the most important stock market anomalies, i.e., the weekend effect, the January effect, the turn-of-the-month and holiday effect, the S&P 500 effect, trading by insiders, the momentum of industry portfolio, home bias, the Value Line enigma and the expiry of IPO lockups. These anomalies cannot be explained by traditional finance theory and, since they show persistency, do not constitute arbitrage opportunities. Each anomaly is described, evidence is supplied and explanations are provided when available.

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previous chapter Modern Portfolio Theory and Its Problems
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Footnotes
1
Fama (1970).
 
2
Basu has shown that low P/E stocks tend to outperform both the market and high P/E stocks. In What Works on Wall Street, O’Shaughnessy found that the P/E ratio is particularly relevant for large stocks. However, he argued that the price-to-sales ratio is an even better indicator of excessive returns. Fama and French find that market and size factors in earnings help explain the P/E ratio effect . See O’Shaughnessy (1998, p. 16), Basu (1977) and Fama and French (1995).
 
3
Chen and Singal (2003, p. 80).
 
4
French (1980, p. 56).
 
5
Singal (2006, p. 45).
 
6
Kamara (1997).
 
7
Agrawal and Tandon (1994, p. 101)
 
8
Steeley (2001).
 
9
Liu and Li (2010).
 
10
Chen and Singal (2003).
 
11
Singal (2006, p. 48).
 
12
Singal (2006, p. 48).
 
13
Sias and Starks (1995, p. 66).
 
14
The bid-ask bounce is the process that on Fridays, the asset is traded at Friday’s ask price at the close of trading, whereas on Mondays, it trades at Fridays’ bid price at the start of the trading session.
 
15
Damodaran (1989, p. 607).
 
16
Damodaran (1989, p. 616).
 
17
Patel (2012, p. 109).
 
18
Singal (2006, p. 47).
 
19
Singal (2006, p. 42).
 
20
Rozeff and Kinney, Jr. (1976, p. 349).
 
21
Rozeff and Kinney, Jr. (1976, p. 349).
 
22
Donald Keim received his Ph.D. from the University of Chicago in 1983. He is very well known and widely cited for the discovery of the January effect. Currently, he is teaching at Wharton University as John B. Neff Professor of Finance.
 
23
Keim (1983).
 
24
Bhardwaj and Brooks (1992) and Eleswarapu and Reinganum (1993).
 
25
Haugen and Jorion (1996, p. 27).
 
26
Chang and Pinegar (1986).
 
27
Investment grade bonds are bonds audited by rating agencies like Moody’s or Fitch Rating. An investment grade is any rate between AAA and BBB- or Aaa and Baa. Non-investment grade (also known as junk ) spans from BB (or Ba) to D (default). They help to evaluate the default risk associated with a bond and are used by investors to assess the credit worthiness of a corporate or sovereign bond. See Maxwell (1998).
 
28
Honghui Chen is an assistant professor at the University of Central Florida, Orlando. Vijay Singal, CFA, is J. Gray Professor of Finance at Pamplin College of Business, Virginia Tech, Blacksburg.
 
29
Chen and Singal (2003).
 
30
Bhabra et al. (1999).
 
31
Singal (2006, p. 33).
 
32
Singal (2006, p. 37).
 
33
Kunkel and Compton (1998, p. 207), Ziemba (1991, p. 119) and Hensel and Ziemba (1996, p. 17).
 
34
Scott (2003).
 
35
Lakonishok and Smidt (1988).
 
36
Ariel (1987).
 
37
Ziemba (1991).
 
38
Hensel and Ziemba (1996, p. 21).
 
39
Kunkel and Compton (1998).
 
40
Cadsby and Ratner (1992).
 
41
Russell Investment Group website: http://​www.​russell.​com/​us/​education_​center. See alsoGonzalez (1996).
 
42
Lakonishok and Smidt (1988), Ariel (1990), Cadsby and Ratner (1992).
 
43
The acronyms stand for New York Stock Exchange, American Stock Exchange and National Association of Securities Dealers Automated Quotations.
 
44
Kim and Park (1994).
 
45
Brockman and Michayluk (1998, p. 205).
 
46
Russel and Torbey (2002).
 
47
Singal (2006, p. 47).
 
49
Singal (2006, p. 165).
 
50
Harris and Gurel (1986, p. 815) and Shleifer (1986, p. 583).
 
51
Arbel (1985, p. 4) and Chen, Noronha, and Singal (2003, pp. 1901–1902).
 
52
Denis, McConnell, Ovtchinnikov, and Yu (2003, p. 52).
 
53
Shleifer (1986, p. 579).
 
54
Chang and Suk (1998).
 
55
Wurgler and Zhuravskaya (2002, p. 583).
 
56
Hegde and McDermott (2003).
 
57
Singal (2006, p. 171).
 
58
Kaul, Mehrotra, and Morck (2000).
 
59
Harris and Gurel (1986).
 
60
Singal (2006, p. 172).
 
61
Singal (2006, pp. 171–173).
 
62
Bos (2000).
 
63
Dash (2002).
 
64
Blume and Edelen (2002, p. 1).
 
65
SEC stands for Unites States Securities and Exchange Commission. Their mission is to monitor and control investment activities.
 
66
Singal (2006, p. 135).
 
67
Lakonishok and Lee (2001).
 
68
Eckbo and Smith (1998).
 
69
Damodaran and Liu (1993).
 
70
Kahle (2000).
 
71
Seyhun (1992, p. 1303).
 
72
Lakonishok and Lee (2001, pp. 89–96).
 
73
Singal (2006, p. 139).
 
74
Singal (2006, p. 155).
 
75
Roth and Saporoschenko (1999).
 
76
Barclay and Warner (1993).
 
77
Kahle (2000).
 
78
Singal (2006, p. 142).
 
79
Lakonishok and Lee (2001).
 
80
Lakonishok and Lee (2001, p. 93).
 
81
Benesh and Pari (1987).
 
82
Singal (2006, p. 158).
 
83
Bettis, Vickrey, and Vickrey (1997).
 
84
Friederich, Gregory, Matatko, and Tonks (2002).
 
85
Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements, in this specific case short-term movements.
 
86
A re-release is a piece of information that has already been given public. The Wall Street Journal in this case publishes once again an information that is already public on the market.
 
87
Ferreira and Brooks (2000).
 
88
Chang and Suk (1998).
 
89
Benesh and Pari (1987).
 
90
Singal (2006, pp. 137–138).
 
91
The stock momentum is calculated based on the change in the value of stocks between two dates. The intra-industry momentum is calculated based on the change in the value of stocks in a specific industry index multiplied by the aggregate trading volume occurring within the index components. The cross-industry momentum is calculated based on the change in the value of an industry index multiplied by the aggregate trading volume occurring within the selected industries used as benchmark.
 
92
Singal (2006, p. 78).
 
93
A company in the upstream part of a supply chain is one of the final customers of the product. If for instance, Goodyear, which produces tires for the car industry, is the upstream company, then the corporation owning the trees which supply the raw material would be a downstream company in the supply chain. See Menzly and Ozbas (2004).
 
94
Menzly and Ozbas (2004, p. 9).
 
95
Menzly and Ozbas (2004, p. 12).
 
96
Moskowitz and Grinblatt (1999).
 
97
Grundy and Martin (2001, pp. 1, 22 and 31).
 
98
Moskowitz and Grinblatt (1999).
 
99
O’Neal (2000, p. 37).
 
100
O’Neal (2000, p. 37).
 
101
Chan, Jegadeesh, and Lakonishok (1999).
 
102
Jegadeesh and Titman (1993).
 
103
Jegadeesh and Titman (1993, p. 89).
 
104
Jegadeesh and Titman (1993, p. 89).
 
105
Moskowitz and Grinblatt (1999).
 
106
Menzly and Ozbas (2004) and Holden and Subrahmanyam (2002).
 
107
Singal (2006, p. 83).
 
108
Singal (2006, p. 83).
 
109
Hong and Stein (1999).
 
110
Hong and Stein (1999, p. 2143).
 
111
A real estate investment trust is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
 
112
Daniel, Hirshleifer, and Subrahmanyam (1998, p. 363) and Hong and Stein (1999).
 
113
Chui, Titman, and Wei (2003).
 
114
Sell-side analysts analyze a small amount of stocks in a specific industry and try to sell their report stating a given expected return in the upcoming period.
 
115
Singal (2006, p. 83).
 
116
Gao (2006).
 
117
Jegadeesh and Titman (1993, p. 90).
 
118
Jegadeesh and Titman (1993, p. 65).
 
119
Grinblatt, Titman, and Wermers (1995, pp. 1088 and 1093).
 
120
This paragraph was based on Chui et al. (2003).
 
121
Singal (2006, p. 87).
 
122
Feder, Just, and Schmitz (1980).
 
123
Johnson (2002).
 
124
Grundy and Martin (2001).
 
125
Grundy and Martin (2001, p. 29).
 
126
Grundy and Martin (2001, pp. 1 and 3).
 
127
Dellva, DeMaskey, and Smith (2001).
 
128
Dellva et al. (2001).
 
129
Lesmond, Schill, and Zhou (2004).
 
130
Lewis (1999).
 
131
Tesar and Werner (1995).
 
132
French and Poterba (1991).
 
133
French and Poterba (1991, p. 223).
 
134
The home share was computed using market capitalization data from the International Federation of Stock Exchanges (FIBV), and the international investment positions were provided by the International Monetary Fund (IMF) . See Jeske (2001, p. 33).
 
135
Lintner (1965, p. 13).
 
136
A market clearing price is the price of a good or service at which the quantity supplied is equal to the quantity demanded. It is sometimes referred to as equilibrium price.
 
137
French and Poterba (1991).
 
138
Monthly returns are annualized. Nominal returns for countries’ equity markets were taken from MSCI (http://​www.​msci.​com). Returns were then deflated by countries’ CPI (consumer price index) data (from International Financial Statistics) and converted into the corresponding country’s home currency. See Jeske (2001).
 
139
French and Poterba (1991).
 
140
Kim and Singal (1997).
 
141
Kim and Singal (1997).
 
142
Sarkar and Li (2002).
 
143
Sarkar and Li (2002, p. 3).
 
144
International Finance Corporation (1997, p. 55).
 
145
All the figures presented are extracted from International Finance Corporation (1997, p. 55).
 
146
Clarke and Tullis (1999).
 
147
Clarke and Tullis (1999, p. 33).
 
148
The acronym EAFE stands for Europe, Australasia (Australia and New Zealand), and the Far East.
 
149
Singal (2006, p. 239).
 
150
Adverse selection, anti-selection or negative selection is a term used in economics. It refers to a market process in which undesired results occur when buyers and sellers have asymmetric information (access to different information); the bad products or services are more likely to be selected.
 
151
Coval and Moskowitz (1999).
 
152
Coval and Moskowitz (1999).
 
153
Huberman (2001).
 
154
Regional Bell Operating Companies (RBOC) are the result of what is called United States v. AT & T, the U.S. Department of Justice antitrust suit against the former American Telephone & Telegraph Company (later known as AT&T Corp.). On January 8, 1982, AT&T Corp. settled the suit and agreed to divest its local exchange service operating companies. Many local firms emerged from the AT&T split into regional companies.
 
155
Mutual funds that invest internationally probably will have higher costs than funds that invest only in U.S. stocks. They are also liable to investment style risk: although the fund prospectuses mandate the percentages and limits of where and what to invest in, the latitude can still allow for some wide variances in style and strategy.
 
156
An ADR is a registered security issued by a U.S. bank representing shares of a foreign stock. ADRs trade on U.S. stock exchanges and on the over-the-counter market. The price of an ADR corresponds to the price of the foreign stock in its home market, with some adjustments.
 
157
iShares are index funds that trade like stocks. They are similar in fashion to ETFs (equity traded funds). Shares are available for both U.S. and international equity indexes. The key difference between iShares and mutual fund index funds is that mutual fund trades are executed at the end of the day (market close). iShares trade throughout the day whenever the market is open.
 
158
Although in the U.S. markets most foreign stocks trade as ADRs, some foreign stocks trade in the same form as in their local market. International investing can be more expensive than investing in U.S. companies. In smaller markets, there may be a premium for purchasing shares of popular companies. In some countries, there may be unexpected taxes or transaction costs such as fees or broker commissions. Taxes are often higher than in U.S. markets. Mutual funds that invest abroad often have higher fees and expenses than funds that invest in U.S. stocks, in part because of the extra expense of trading in foreign markets.
 
159
Jeske (2001, p. 31).
 
160
Jeske (2001, pp. 35–36).
 
161
Jeske (2001, pp. 35–36).
 
162
Coën (2001).
 
163
Deadweight cost is the extent to which the direct impact of an increase or reduction in tax (or subsidies) is lessened by its indirect effect. For instance, a corporate tax hike will boost government revenue but may also cause companies to go broke, which would have a negative impact on government finances.
 
164
French and Poterba (1991).
 
165
Hasan and Simaan (2000).
 
166
Overconfidence arises from the belief that one’s knowledge is of great quality in spite of conflicting evidence. An in-depth explanation is proposed in Sect. 5.​3.​5 which introduces behavioral finance in order to explain stock market crashes.
 
167
Herding is an attitude of individuals who follow a trend rather than higher quality information which they possess in the context of finance for instance. See Sect. 5.​3.​3 for an in-depth explanation.
 
168
Goetzmann and Kumar (2001).
 
169
Ryan and Siebens (2012, p. 2).
 
170
Goetzmann and Kumar (2001).
 
171
Coën (2001).
 
172
Schoenmaker and Bosch (2008).
 
176
Source: Bloomberg (ticker: INDU:IND).
 
178
This is the weighting average for rank 1 and 2 stocks, given that there are 100 stocks in rank 1 and 300 stocks in rank 2, we then have to multiple their relative weight by their respective performance.
 
179
Source: Own, based on historical data. Large differences are still observed even starting in 1900 or in 1982 until 2013.
 
181
Porras and Griswold (2000).
 
182
Black and Kaplan (1973).
 
183
Copeland and Mayers (1982).
 
184
Stickel (1985).
 
185
Porras and Griswold (2000, p. 39).
 
186
Leinweber (1995, p. 2).
 
187
Porras and Griswold (2000, p. 40).
 
188
Affleck-Graves and Mendenhall (1992).
 
189
Stickel (1985, p. 121).
 
190
Choi (2000) and Peterson (1995).
 
191
Copeland and Mayers (1982).
 
192
Peterson (1995).
 
193
Zhang, Nguyen, and Le (2010) reaches the same conclusion, see p. 372.
 
194
Choi (2000).
 
195
Porras and Griswold (2000).
 
196
Porras and Griswold (2000).
 
197
Lustig and Leinbach (1983, p. 46).
 
198
Huberman and Kandel (1987).
 
199
Stickel (1985, p. 121).
 
200
Huberman and Kandel (1990, p. 187).
 
201
Black and Kaplan (1973).
 
202
Leinweber (1995, p. 2).
 
203
Perold (1988).
 
204
Choi (2000).
 
205
Leinweber (1995, p. 41).
 
206
Leinweber (1995, p. 42).
 
207
Salomon Jr. (1998).
 
208
Porras and Griswold (2000, p. 40).
 
209
Zhang et al. (2010).
 
210
Zhang et al. (2010, p. 362).
 
211
Reilly and Hatfield (1969) and Stoll and Curley (1970).
 
212
Ritter and Welch (2002, Table 1, p. 4).
 
213
Field and Hanka (2001, p. 472).
 
214
Healtheon was a dotcom startup company. Healtheon’s business plan was to streamline communication and paperwork in the United States health care system. They developed software that placed their company between physicians, patients, and health care institutions, eliminating unnecessary paperwork and facilitating networking and communication amongst the three.
 
215
Field and Hanka (2001, p. 472).
 
216
Facebook is a social networking service launched in February 2004. In 2012, Facebook had over one billion active users.
 
217
Source: Bloomberg (ticker: FB:US).
 
218
Ritter (1991).
 
219
Loughran and Ritter (1995, p. 30).
 
220
Loughran and Ritter (1995, p. 49).
 
221
Aggarwal and Rivoli (1990).
 
222
Field and Hanka (2001, Table IV, p. 482).
 
223
Field and Hanka (2001, Table IV, p. 482).
 
224
Bradley et al. (2001, p. 14).
 
225
Field and Hanka (2001, p. 473).
 
226
Rule 144 allows the public resale of restricted and controlled securities if a number of conditions are met. For example, holding period, adequate stock information, personal information and trading volume are criteria limiting the resale. The complete rule set is available at the following website: http://​www.​sec.​gov/​investor/​pubs/​rule144.​htm. Also see Keasler (2001).
 
227
Adverse selection, anti-selection, or negative selection is a term used in economics. It refers to a market process in which undesired results occur when buyers and sellers have asymmetric information (access to different information); the bad products or services are more likely to be selected.
 
228
Brau et al. (2005).
 
229
Brav and Gompers (2003).
 
230
Aggarwal, Krigman, and Womack (2002).
 
231
Aggarwal et al. (2002).
 
232
Field and Hanka (2001, p. 473).
 
233
Ofek and Richardson (2000).
 
234
Ofek and Richardson (2000, p. 2).
 
235
Closing ask price on the previous day can be taken as today’s bid price. While creating no abnormal return, the anomaly would be related to normal market frictions between bought and sold stocks.
 
236
Investors prefer liquid assets and pay a premium for them. Illiquid assets perform less well.
 
237
Large demand or supply expectations are a fear factor for investors. In the case of not knowing the appropriate expectation, a small drift toward the correct stock price can be observed.
 
238
Ofek and Richardson (2000).
 
239
The shift in supply can be explained by the fact that on the IPO date, company owners typically sell 15–20 % of their stock. On lockup expiry, more shares can be sold.
 
240
Field and Hanka (2001).
 
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Metadata
Title
Stock Market Anomalies
Authors
Marcus Schulmerich
Yves-Michel Leporcher
Ching-Hwa Eu
Copyright Year
2015
Publisher
Springer Berlin Heidelberg
Book
Applied Asset and Risk Management

Print ISBN: 978-3-642-55443-8

Electronic ISBN: 978-3-642-55444-5

Copyright Year: 2015

DOI
https://doi.org/10.1007/978-3-642-55444-5_3