#analyst-notes #market-efficency
Cross-Sectional Anomalies
If the semi-strong EMH is true, all securities should have equal risk-adjusted returns because security prices should reflect all public information that would influence the security's risk. Using public information, is it possible to determine what stocks will enjoy above-average, risk-adjusted returns?
The
size effect relates to the impact of size (measured by the total market value) on risk-adjusted rates of return. Some researchers found that the small firms outperformed the large firms after considering risk and transaction costs.
Basu's study concluded that publicly available P/E ratios possessed valuable information, and the risk-adjusted returns for stocks in the lowest P/E ratio quintile were superior to those in the highest P/E ratio quintile. This is known as the
value effect.
Fama and French found that both size and BV/MV ratio are significant when included together, and they dominate other ratios. The dramatic dependence of returns on market-to-book ratio is independent of beta, suggesting either that low market-to-book ratio firms are relatively underpriced, or that the market-to-book ratio is serving as a proxy for a risk factor that affects equilibrium expected returns.
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Subject 3. Market pricing anomaliesket momentum do seem to exist, researchers have argued that the existence of momentum is rational, and the additional return (based on the contrarian investment strategy) would come simply at the expense of increased risk.
<span>Cross-Sectional Anomalies
If the semi-strong EMH is true, all securities should have equal risk-adjusted returns because security prices should reflect all public information that would influence the security's risk. Using public information, is it possible to determine what stocks will enjoy above-average, risk-adjusted returns?
The size effect relates to the impact of size (measured by the total market value) on risk-adjusted rates of return. Some researchers found that the small firms outperformed the large firms after considering risk and transaction costs.
Basu's study concluded that publicly available P/E ratios possessed valuable information, and the risk-adjusted returns for stocks in the lowest P/E ratio quintile were superior to those in the highest P/E ratio quintile. This is known as the value effect.
Fama and French found that both size and BV/MV ratio are significant when included together, and they dominate other ratios. The dramatic dependence of returns on market-to-book ratio is independent of beta, suggesting either that low market-to-book ratio firms are relatively underpriced, or that the market-to-book ratio is serving as a proxy for a risk factor that affects equilibrium expected returns.
Other Anomalies
Closed-End Investment Fund Discounts. Closed-end funds usually trade at substantial discounts relative to their net asset values. Summary
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