From time to time, financial systems experience unexpected anomalies that highly contribute to mispricing of securities. One of the factors that have been closely associated with these anomalies is behavioral anomalies. Various studies have sought to establish how behavioral anomalies various aspects of an efficient market, like stock pricing. The above-mentioned anomalies seem to contradict most of the common modern day economic theories that are conventionally used to predict the logical market tendencies. The most common behavioral anomalies in the equity markets are the January effect and day of the week effect. It is in this context that this paper seeks to provide a detailed exposition of how the aforementioned anomalies bring about pricing anomalies in the stock market.
The January Effect
This phenomenon brings forth the argument that the return on stock investment is much higher in January than in other months of the year. Most economists argue that this anomaly is mainly due to the price pressures that various institutional investors put on various stocks towards the beginning and the end of the year (Patel, 2016). It is also, to some extent, attributed to the fact that most stock investors tend to sell off dead stock at the end of the year in order to evade any accrued capital gains tax liabilities. The January effect contradicts the efficient market hypothesis theory which suggests that the changes in stock prices have similar distribution across the year and ought to be independent of each other. The phenomenon of “The January Effect” was coined in the late 1970’ after some researchers found out that the average return on stock investments for most firms was 3.5% in January and 0.5% throughout the other months of the year (Patel 2016). From this case, the economic researchers who participated in the study found out that there was an unconventional factor affecting stock performance in the month of January. The January effect has a tremendous effect on the demand, sales and obviously the price of various stocks during and around the month of January. For this reason, most stock’s prices hike around January (Thaler and Ganser 2015).
The Day of the Week Effect
This is yet another anomaly that completely goes against all modern economic theory. This phenomenon, which is also referred to as the weekend effect, dictates that, generally, there is a significantly lower performance in the stock market on Mondays (Nassar 2016). Research on various markets has proven that stock performance indices are much higher on Friday’s as compared to Mondays. Various contradicting explanations have been provided for this economic anomaly. One of the explanations for this anomaly is that most company tends to delay in announcing bad new and end up announcing them towards the end of the week. For this reason, fewer people will be enthusiastic about buying stock from such companies on Mondays. For this and other explanations, there isn’t enough empirical evidence to substantiate the actual cause of “the day of the week effect” (Nassar 2016). Evidently, this anomaly has a tremendous effect on stock prices across all market. Because the stock demand is low on Mondays, the stock prices tend to depreciate.
The information provided in this paper justifies the argument that stock prices are, in a big way affected by various behavioral anomalies. Form it, it would be justified to argue to argue that there are some economic issues that are not completely addressed by the existing economic theories. To sum it up, the day to day stock pricing is a variant of not only market trends but also various market anomalies.
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