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10

Very good question! I think part of the answer lies in the structure of the financial industry. Some anomalies have a certain kind of structure which cannot be exploited by the players that are big enough to let the anomaly disappear. I would put e.g. the Turn-of-the-month effect (TOTM) into this category since big funds just can't turn their whole ...


7

A very conservative stand is to distinguish between anomalies and arbitrage opportunities. Roughly speaking, while an arbitrage opportunity is risk-free by definition, an anomaly allows for unaccounted risk factors. It is the magnitude of these unidentified risk factors that might determine the long term persistance of certain anomalies. A good starting ...


5

The study you cited seems to be exaggerating slightly. 1) "An interesting fact of returns is that all of the stock returns since 1993 are from overnight returns" -> This is simply factually incorrect. Why don't you pick the S&P 500 names, you calculate the log returns taking into account price changes from the open to the close, then you do the same ...


4

Joel Greenblatt's "magic formula" is similar in spirit to classic value styles. He has a discussion of why he thinks it will continue to work (despite it's simplicity and public knowledge) around p. 73 in his Little Book that Beats the Market (see ...


4

This the "Joint Hypothesis Problem". Basically, any test for abnormal returns is also implicitly a test of the model you use to define "abnormal". If you see a significant and positive $\alpha$, that could either mean that you actually are generating excess risk-adjusted returns, or it could mean that your risk model is incomplete. This is basically what ...


4

A new explanation that isn't well known (yet) has to do with human capital. Key employees are most likely to leave in January, after bonuses are paid. In anticipation of this risk, prices decline before January, and then if the key people don't leave, prices rise in January. And, voila... the January effect. See this paper. Their results work much better ...


2

I would say the main difference between "risk factor" and "market anomaly" is that people demand to be compensated for risk and because there are different kinds of risks these can be systematized into risk factors whereas anomalies are results of behavioral biases. Another big difference would be that risk factors will stay because of the need for ...


1

Nice question! I don’t have a precise answer to it but I will try somehow to give you my thoughts. I think it depends a lot whether you have in mind an APT or an ICAPM as explained in this article by Eugene Fama. The APT is really agnostic regarding the risk premia and the factors, and basically the only prediction is that alphas are going to vanish thanks ...


1

There are a couple of nice papers about the dot-com effect by Michael Cooper: full list, paper1, paper2


1

This was documented in this working paper about 6 years ago. I wonder why it was never published... may be some problem with the results.


1

No, the "low-beta" anomaly is not the result of the difference between arithmetic and geometric mean returns. Statistical tests verifying the existence of the anomaly rely on models employing the arithmetic mean returns, $$\mu_a = \mu_g + \frac{\sigma^2}{2}$$, hence the penalty excess volatility incurs when compounding returns over time does not explain the ...


1

Investing in Stock Market Anomalies by Bali, Brown, and Demirtas (2011) addresses some of my questions. I will read this paper and report back on my findings.


1

In the stock market, successful companies are the most innovative ones (esp in biotech, tech) so their individual market is new and their individual market has not been arbitraged away by competitors and governments. Therefore upcoming competitors are going to be as optimistic and correlated to the market leaders. Just from trading shares and financial ...



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