Stock trading anomalies
Stock market can be regarded as a kind of dynamic system, which at each moment of time tends to efficiency. Nevertheless numerous empirical studies revealed curious regularities, which steadily repeat in the history and which can be interpreted as "anomalies" (manifestations of market inefficiency) - on the basis of these anomalies we can build simple strategies to generate additional income. It is them we will consider in this issue.
Momentum Effect: buying shares of leaders, selling outsiders
In a study of the U.S. stock market from 1965 to 1989, Titman and Jegadesh found an inertia effect.
They chose two groups out of all the many stocks:
Leadership Shares - stocks that have outperformed the market over the last 3 months (the income from holding these stocks has outperformed the average market income over the interval in question)
Outsider stocks - stocks, which over the last 3 months have been worse than the market
It turned out that during the next six months the strategy of buying shares of leaders and selling shares of outsiders (buy winner - sell loser) yields 10% higher than the market average (with a commensurate level of risk). Moreover, at a horizon of more than a year the profitability of this strategy does not exceed the market average (often leading to losses).
This effect is observed not only in the U.S. market - as further research has shown, the proposed simple strategy proved itself well in the financial markets of twelve European countries.
One explanation for this effect could be psychological - people tend to be overly optimistic about the prospects of leaders and pessimistic about outsiders, judging the probability of events by the frequency with which they have occurred in the past (see Behavioral Finance | How Rational Are We?).
The calendar effects of stock trading
January Effect - profitability sharesThe average prices in January, especially of the shares of small companies, are much higher than in the rest months of the year (this effect is also evident at the bond market). The explanation of this "anomaly" may be the fact that December is the end of the tax period, and most investors prefer to get into cash (money) before paying taxes, i.e. to fix the loss/profit (especially in the case of low-liquid stocks).
Turn of the Month Effect - the yield for the period including the last day of the month and the first four days of the next month is higher than the statistical average. This can be explained by the fact that this period includes the payment of salaries, bonuses, etc.
Weekend Effect - Small stocks tend to go up on Friday and tend to go down on Monday. This effect is explained by the fact that most of the speculators who play downside in high-risk assets prefer to close short positions on Friday and open them again on Monday (not ready to leave a position for three days). It should be noted that in recent years this effect is not so pronounced.
The Monday Effect - stock returns on Mondays are, on average, lower than on other days. This is partly explained by the effect of the weekend, but probably there is also a psychological moment - as you know, Monday is a hard day, in particular, according to statistics, suicides are most often committed exactly on this day.
Weather anomalies - Despite the popular recommendation "Sell in may" (sell in May before going on vacation), there is no steady manifestation of the influence of natural factors on the dynamics of stock markets (probably due to the globalization of markets).
Multipliers and analyst predictions (Fundamental Anomalies)
Low value of the ratio of market and book value of the company PV/BV (Price to Book Value), the ratio of market capitalization (value) of the company P/S (Price to Sales), the ratio of market capitalization to profit P/E (Price to Earnings) - the shares of companies with a relatively low value of these multipliers on average bring more income (the dynamics is better than the market) than the shares of companies with a relatively high value of these multipliers.
For stocks with high dividend Dividend Yield is characterized by better market dynamics.
Empirical studies have also shown that analysts are characterized by excessive optimism, especially in the case of long-term forecasts (for five years or more). In particular, forecasts do not fully take into account the cyclical nature of the economy. In addition, analysts tend to underestimate negative news and overestimate positive news.
Initial Public Offerings (IPO)
The initial public offerings are characterized by a certain overestimation of the long-term prospects of the company:
- According to statistics for the period 1990-2001, U.S. stock exchanges saw an increase in company stock prices on the first day of trading after the IPO - by an average of 25%.
- Investors who purchased the company's shares on the first day of trading after the IPO (at the market price) realized a 50% lower than market average return over a five-year horizon.
This effect is partly due to the support of underwriters (who have the option to sell shares at a price higher than the offering price).
The relevance of the listed anomalies of stock trading
Most of the "anomalies" (as we noted above) have a fairly logical explanation, which reflects not the inefficiency of the market, but rather the heterogeneity of investors (investment horizon, risk assessment, risk tolerance, etc.). Nevertheless, as the current crisis has shown, the speculative aspect was present in the system itself (at least for the last five years), which itself was the biggest "anomaly. The current state of the market is far from typical, so its behavior may differ strikingly from the average. However, history tends to repeat itself - at least in the next turn of development, so it is very likely that many of the above patterns will manifest themselves in the future as well.
Those interested should read Vijay Singal's book 'Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing.