**3. Market anomalies**

Some stock markets show deviations from the known principles of EMH. These deviations can take place sometimes just once but sometimes can take place repeatedly and are usually referred to as 'anomalies' [14]. Dictionary definition of anomaly is an occurrence that is irregular, is not usual or is strange, and it is usually used to explain scientific issues or technological matters [41]. They reflect inefficient markets. Therefore, this section of the chapter will focus on market anomalies and show if there is a possibility of identifying gaps in the stock market. Gaps, where opportunities for investors are created, allow them to earn above normal profits.

To make it easier to analyse, we can categorise anomalies into three groups (calendar, fundamental and technical). As the name suggests, calendar anomalies focus on a certain time period. Calendar anomalies include anomalies such as day-of-the-week, turn-of-the-year and January effects. Fundamental anomalies include book-to-market ratio, value anomaly, high dividend yield and many more. Lastly, technical anomalies involve a technical analysis to predict future prices. Examples can be moving averages and trading range break anomalies [14]. We will explain few types of market anomalies which are more apparent in emerging economies and more experimented.

#### **3.1. Day-of-the-week effect**

Day-of-the-week anomaly, developed originally by French, states that stock returns are not always the same during the week, and different days generate different returns [42]. Majority of the studies show that returns earned on Mondays are usually much lower than the rest of the days, whereas returns generated on Fridays are the highest [43, 44]. Using this knowledge, an investor can buy stocks on a day when the prices are the lowest and sell it when the prices are at the highest point, hence, showing the inefficiency found in the stock market.

Besides the ones that accept the day-of-the-week effect, the remaining are divided into two thoughts: the ones that argue that there is such thing as the day-of-the-week effect, but it is not an anomaly (such as the difference in the trading days and the non-trading problems), and the others (such as econometric methodology, calendar time vs. trading time and the offsetting effect of liquidity hypotheses) who say that it never existed [45].

This anomaly has taken interest of researchers when studying emerging economies because, probably, together with other types of anomalies, it provides an explanation for why these markets are generally inefficient. Let's consider the following studies as examples to the dayof-the-week effect on emerging economies. They provide evidence to both views. Poshakwale studied the Bombay Stock Exchange for the years between 1987 and 1994, to see if the dayof-the-week effect exists within the market. Results of the study showed that the weak form of efficiency did not hold for this market and that the day-of-the-week effect existed [46]. But, to present a different view, Basher and Sadorsky looked at 21 emerging stock markets from around the world. Data was taken from the period between 1992 and 2003. Their results indicated that majority of the emerging markets did not show signs of the day-of-the-week effect except for the Philippines, Pakistan and Taiwan [47].

#### **3.2. January effect**

again, there is not much evidence yet to fully support this theory. A study conducted by Garas and Argyrakis showed a relationship between financial crisis and market efficiency. They have looked at the Athens Stock Exchange stock prices between the years 1987 and 2004 and concluded that during the crisis, the stock market became less efficient, i.e. market showed lower efficiency [39]. However, at the same time, Hoque et al. looked at pre- and postcrisis periods and pointed out that there was no relationship between the crisis and market efficiency [40].

Some stock markets show deviations from the known principles of EMH. These deviations can take place sometimes just once but sometimes can take place repeatedly and are usually referred to as 'anomalies' [14]. Dictionary definition of anomaly is an occurrence that is irregular, is not usual or is strange, and it is usually used to explain scientific issues or technological matters [41]. They reflect inefficient markets. Therefore, this section of the chapter will focus on market anomalies and show if there is a possibility of identifying gaps in the stock market. Gaps, where opportunities for investors are created, allow them to earn above normal profits. To make it easier to analyse, we can categorise anomalies into three groups (calendar, fundamental and technical). As the name suggests, calendar anomalies focus on a certain time period. Calendar anomalies include anomalies such as day-of-the-week, turn-of-the-year and January effects. Fundamental anomalies include book-to-market ratio, value anomaly, high dividend yield and many more. Lastly, technical anomalies involve a technical analysis to predict future prices. Examples can be moving averages and trading range break anomalies [14]. We will explain few types of market anomalies which are more apparent in emerging

Day-of-the-week anomaly, developed originally by French, states that stock returns are not always the same during the week, and different days generate different returns [42]. Majority of the studies show that returns earned on Mondays are usually much lower than the rest of the days, whereas returns generated on Fridays are the highest [43, 44]. Using this knowledge, an investor can buy stocks on a day when the prices are the lowest and sell it when the prices are

Besides the ones that accept the day-of-the-week effect, the remaining are divided into two thoughts: the ones that argue that there is such thing as the day-of-the-week effect, but it is not an anomaly (such as the difference in the trading days and the non-trading problems), and the others (such as econometric methodology, calendar time vs. trading time and the

This anomaly has taken interest of researchers when studying emerging economies because, probably, together with other types of anomalies, it provides an explanation for why these

at the highest point, hence, showing the inefficiency found in the stock market.

offsetting effect of liquidity hypotheses) who say that it never existed [45].

Therefore, it is an area that can be exploited in the near future.

56 Financial Management from an Emerging Market Perspective

**3. Market anomalies**

economies and more experimented.

**3.1. Day-of-the-week effect**

January effect anomaly states that returns generated vary according to the months within the year. In January, the highest returns are expected when compared to the rest of the year. Therefore, January effect is classified under seasonality and, like the day-of-the-week anomaly, has a big impact on the investor's decisions. If seasonality is found, then this means that the EMH will not hold. Investors will then be able to use available information to gain profits over others in the market [27].

However, these are a debate over whether this anomaly still exists or not. According to one view, January effect still exists, whereas another view says that it has lost its momentum and might even have become extinct. But, there is a third view, saying that it might have become extinct in countries like the USA, but it still holds for others, such as in the countries with emerging economies. Study by Patel looked at whether January effect existed in international stock returns, by examining stock returns from 1997 to 2014. Results indicated that this anomaly did not exist in international markets [48]. There were other studies that supported this finding [49, 50]. However, Guler examined data from five emerging economies: Brazil, China, India, Argentina and Turkey. Data was taken from a period between the first trading day of the stock market in each country and the end of 2012. Results, this time, showed the existence of the January effect in China, Argentina and Turkey [51]. Therefore, it could be understood that there are many studies conducted with varying results. This area needs to be deeply investigated as it has a great impact on investment decisions.

#### **3.3. Small-firm effect**

The previous two types of anomalies mentioned were part of the calendar anomalies. Smallfirm effect, however, is considered to be part of the asset pricing anomalies. It was first put forward by Banz and states that the stock returns are related to the size of the firm [52]. According to the anomaly, the smaller the firm, the higher the expected returns will be. Knowing these will, again, have implications for investors and also relates to the efficiency of the market.

There are few reasons why researchers believe that small firms generate unusually high returns. One of the reasons is that smaller firms have smaller stocks, which contain systematic risks. These risks cannot always be measured correctly. Since they are more prone to risk, small firms will try to compensate it by reflecting it as higher returns. Secondly, when compared to larger firms, they are more focused on increasing their market shares and expanding. Research points out that smaller firms are more likely to reinvest its earnings back into the company and cause the value of its common stock to increase; hence, means increase in returns in the future [53].

Small-firm effect and the January effect are anomalies that actually go hand in hand with one another. Research shows that stock prices of smaller firms were observed to be more affected by the January effect than larger firms [54]. Rogalski and Tinic also stated that returns of smaller firms were much higher in January than any the other months in the year [55]. This can be referred to as an 'anomaly within an anomaly' [56].

It is indicated in research that people who live in countries with emerging economies tend to experience more behavioural biases which makes it more interesting to search for anomalies in the markets of these countries [56]. For example, Chui and Wei examined the size effect in Hong Kong, Korea, Malaysia, Taiwan and Thailand using monthly data from 1977 to 1993. Their results showed that the small-firm effect (size effect) was present in all of the analysed countries except for Taiwan [57]. The effects of these anomalies are important to know, and there is lack of information. Therefore, this particular area in research should be considered and focused more by researchers.

#### **3.4. Other anomalies**

As part of the calendar anomalies, we can mention two more: turn-of-the-month effect and turn-of-the-year effect. According to the turn-of-the-month effect, on the last trading day of the month plus the first three days of the next month, an increase in the stock prices is expected. With the same principle, turn-of-the-year effect is about the increase in the stock prices in the last week of December.

Under the fundamental anomalies identified, low price-to-book anomaly states that the lower the price-to-book ratio, the higher the returns will be. Value anomaly takes place when investors over or under estimate the stock returns in the market. Low price-to-earnings (P/E) ratio, which is a common studied anomaly, states that the lower the P/E ratio, the more returns will be [14].
