Efficiency and Anomalies in Stock Markets

A special issue of Economies (ISSN 2227-7099).

Deadline for manuscript submissions: closed (31 May 2019) | Viewed by 100580

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Guest Editor
1. Department of Finance, Fintech & Blockchain Research Center, Big Data Research Center, Asia University, Taichung City 41354, Taiwan
2. Department of Medical Research, China Medical University Hospital, Taichung City 40447, Taiwan
3. Department of Economics and Finance, The Hang Seng University of Hong Kong, Hong Kong, China
Interests: behavioral models; mathematical modeling; econometrics; energy economics; equity analysis; investment theory; risk management; behavioral economics; operational research; decision theory; environmental economics; public health; time series analysis; forecasting
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Special Issue Information

Dear Colleagues,

The Efficient Market Hypothesis believes that it is impossible for an investor to outperform the market because all available information is already built into stock prices. However, some anomalies could persist in stock markets while some other anomalies could appear, disappear and re-appear again without any warning.

A Special Issue on "Efficiency and Anomalies in Stock Markets" will be devoted to advancements in the theoretical development of market efficiency and anomaly in the Stock Market, as well as applications in Stock Market efficiency and anomalies.

We invite investigators to contribute original research articles in theory, practice and applications of Efficiency and Anomalies in Stock Markets. All submissions must contain original unpublished work not being considered for publication elsewhere.

Prof. Dr. Wing-Keung Wong
Guest Editor

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Published Papers (11 papers)

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Editorial

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4 pages, 178 KiB  
Editorial
Editorial Statement and Research Ideas for Efficiency and Anomalies in Stock Markets
by Wing-Keung Wong
Economies 2020, 8(1), 10; https://doi.org/10.3390/economies8010010 - 10 Feb 2020
Cited by 4 | Viewed by 3328
Abstract
The Efficient Market Hypothesis states that it is impossible for an investor to outperform the market because all available information is already built into stock prices. However, some anomalies could persist in stock markets while some other anomalies could appear, disappear and re-appear [...] Read more.
The Efficient Market Hypothesis states that it is impossible for an investor to outperform the market because all available information is already built into stock prices. However, some anomalies could persist in stock markets while some other anomalies could appear, disappear and re-appear again without any warning. To explore new theories with applications in this direction, in this editorial, we suggest ideas to authors on what types of papers we will accept for publication in the areas of on Efficiency and Anomalies in Stock Markets. We will discuss some papers published in the special issue of Efficiency and Anomalies in Stock Markets. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)

Research

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21 pages, 482 KiB  
Article
Value Premium and Technical Analysis: Evidence from the China Stock Market
by Keith S. K. Lam, Liang Dong and Bo Yu
Economies 2019, 7(3), 92; https://doi.org/10.3390/economies7030092 - 09 Sep 2019
Cited by 4 | Viewed by 5269
Abstract
We find value premium in the Chinese stock market using a conventional buy-and-hold approach which longs the portfolio with the highest BM ratio and shorts the one with the lowest BM ratio. Based on the finding, we test a new strategy by combining [...] Read more.
We find value premium in the Chinese stock market using a conventional buy-and-hold approach which longs the portfolio with the highest BM ratio and shorts the one with the lowest BM ratio. Based on the finding, we test a new strategy by combining the value premium effect and technical analysis. During the sample period (1995 to 2015), we trade the objective portfolio or risk-free asset according to the moving average timing signals, and we find excess return from such a zero-cost trading strategy. We perform various robustness tests and find that the excess returns remain significantly positive after adjusting for risks (on three factor models) and transaction costs. In general, we find that the combined trading strategy can generate significant positive risk-adjusted returns after the transaction costs. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
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11 pages, 749 KiB  
Article
An Experiment on Autoregressive and Threshold Autoregressive Models with Non-Gaussian Error with Application to Realized Volatility
by Ziyi Zhang and Wai Keung Li
Economies 2019, 7(2), 58; https://doi.org/10.3390/economies7020058 - 17 Jun 2019
Cited by 5 | Viewed by 4395
Abstract
This article explores the fitting of Autoregressive (AR) and Threshold AR (TAR) models with a non-Gaussian error structure. This is motivated by the problem of finding a possible probabilistic model for the realized volatility. A Gamma random error is proposed to cater for [...] Read more.
This article explores the fitting of Autoregressive (AR) and Threshold AR (TAR) models with a non-Gaussian error structure. This is motivated by the problem of finding a possible probabilistic model for the realized volatility. A Gamma random error is proposed to cater for the non-negativity of the realized volatility. With many good properties, such as consistency even for non-Gaussian errors, the maximum likelihood estimate is applied. Furthermore, a non-gradient numerical Nelder–Mead method for optimization and a penalty method, introduced for the non-negative constraint imposed by the Gamma distribution, are used. In the simulation experiments, the proposed fitting method found the true model with a rather insignificant bias and mean square error (MSE), given the true AR or TAR model. The AR and TAR models with Gamma random error are then tested on empirical realized volatility data of 30 stocks, where one third of the cases are fitted quite well, suggesting that the model may have potential as a supplement for current Gaussian random error models with proper adaptation. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
9 pages, 237 KiB  
Article
The Impact of Financial Constraints on the Convertible Bond Announcement Returns
by Chong-Chuo Chang, Tai-Yung Kam, Chih-Chung Chien and Wan Ting Su
Economies 2019, 7(2), 32; https://doi.org/10.3390/economies7020032 - 08 Apr 2019
Cited by 4 | Viewed by 4952
Abstract
As of now, very few research studies have examined the effects of financial constraints on the short- and long-term performances of companies after their announcement of convertible bonds. Due to asymmetric information, previous studies consider issuance of convertible bonds as negative news. As [...] Read more.
As of now, very few research studies have examined the effects of financial constraints on the short- and long-term performances of companies after their announcement of convertible bonds. Due to asymmetric information, previous studies consider issuance of convertible bonds as negative news. As a result, the short- and long-term performances of companies generally decline after their convertible bond announcement. This study argues that when companies have investment plans, they are expected to have higher future cash flows. They will become increasingly more valuable regardless of the fact that they raise funds through the issue of convertible bonds (due to financial constraints), positively affecting the performance of companies. The results indicate that financial constraints have no effect on short-term performance, but did have a significantly positive impact on the long-term performance of companies after their issuance of convertible bonds. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
10 pages, 979 KiB  
Article
Put–Call Ratio Volume vs. Open Interest in Predicting Market Return: A Frequency Domain Rolling Causality Analysis
by Sangram Keshari Jena, Aviral Kumar Tiwari and Amarnath Mitra
Economies 2019, 7(1), 24; https://doi.org/10.3390/economies7010024 - 25 Mar 2019
Cited by 6 | Viewed by 15978
Abstract
This study examined the efficacy of the Put–Call Ratio (PCR), a widely used information ratio measured in terms of volume and open interest, in predicting market return at different time scale. Volume PCR was found to be an efficient predictor of the market [...] Read more.
This study examined the efficacy of the Put–Call Ratio (PCR), a widely used information ratio measured in terms of volume and open interest, in predicting market return at different time scale. Volume PCR was found to be an efficient predictor of the market return in a short period of 2.5 days and open interest PCR in a long period of 12 days. Thus, traders and portfolio managers should use the appropriate PCR depending upon the time horizon of their trade and investment. The results are robust even after controlling for the information generated from the futures market. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
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21 pages, 453 KiB  
Article
Influence of Real Exchange Rate on the Finance-Growth Nexus in the West African Region
by Kizito Uyi Ehigiamusoe and Hooi Hooi Lean
Economies 2019, 7(1), 23; https://doi.org/10.3390/economies7010023 - 25 Mar 2019
Cited by 21 | Viewed by 4863
Abstract
This study examines the moderating effects of the real exchange rate and its volatility on the finance-growth nexus in the West African region. It also determines the marginal effects of financial development on economic growth at various levels of the real exchange rates [...] Read more.
This study examines the moderating effects of the real exchange rate and its volatility on the finance-growth nexus in the West African region. It also determines the marginal effects of financial development on economic growth at various levels of the real exchange rates and its volatility. The findings show that financial development has a long-term positive impact on economic growth, but this impact is weakened by real exchange rate and its volatility. The marginal effects of financial development on economic growth vary with the levels of the real exchange rate and its volatility. The higher the real exchange rate and its volatility, the less finance spurs growth. We also provide evidence of this scenario in individual specific countries in the region. The implication of this study is that the development of the financial sector would not provide the desirable economic benefits except it is accompanied by a reduction and stability in the real exchange rates. Based on the findings, the study makes some policy recommendations. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
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17 pages, 1013 KiB  
Article
Market Efficiency and News Dynamics: Evidence from International Equity Markets
by Thomas C. Chiang
Economies 2019, 7(1), 7; https://doi.org/10.3390/economies7010007 - 01 Feb 2019
Cited by 8 | Viewed by 6790
Abstract
This paper examines the efficient market hypothesis by applying monthly data for 15 international equity markets. With the exceptions of Canada and the U.S., the null for the absence of autocorrelations of stock returns is rejected for 13 out of 15 markets. The [...] Read more.
This paper examines the efficient market hypothesis by applying monthly data for 15 international equity markets. With the exceptions of Canada and the U.S., the null for the absence of autocorrelations of stock returns is rejected for 13 out of 15 markets. The evidence also rejects the independence of market volatility correlations. The null for testing the absence of correlations between stock returns and lagged news measured by lagged economic policy uncertainty (EPU) is rejected for all markets under investigation. The evidence indicates that a change of lagged EPUs positively predicts conditional variance. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
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29 pages, 804 KiB  
Article
Which Liquidity Proxy Measures Liquidity Best in Emerging Markets?
by Hee-Joon Ahn, Jun Cai and Cheol-Won Yang
Economies 2018, 6(4), 67; https://doi.org/10.3390/economies6040067 - 11 Dec 2018
Cited by 18 | Viewed by 7706
Abstract
This study empirically investigates the low-frequency liquidity proxies that best measure liquidity in emerging markets. We carry out a comprehensive analysis using tick data that cover 1183 stocks from 21 emerging markets, while also comparing various low-frequency liquidity proxies with high-frequency spread measures [...] Read more.
This study empirically investigates the low-frequency liquidity proxies that best measure liquidity in emerging markets. We carry out a comprehensive analysis using tick data that cover 1183 stocks from 21 emerging markets, while also comparing various low-frequency liquidity proxies with high-frequency spread measures and price impact measures. We find that the Lesmond, Ogden, and Trzcinka (LOT) measure is the most effective spread proxy in most emerging markets. Among the price impact proxies, the Amihud measure is the most effective. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
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24 pages, 499 KiB  
Article
Size, Value and Business Cycle Variables. The Three-Factor Model and Future Economic Growth: Evidence from an Emerging Market
by Fahad Ali, RongRong He and YueXiang Jiang
Economies 2018, 6(1), 14; https://doi.org/10.3390/economies6010014 - 28 Feb 2018
Cited by 21 | Viewed by 10161
Abstract
The paper empirically investigates three different methods to construct factors and identifies some pitfalls that arise in the application of Fama-French’s three-factor model to the Pakistani stock returns. We find that the special features in Pakistan significantly affect size and value factors and [...] Read more.
The paper empirically investigates three different methods to construct factors and identifies some pitfalls that arise in the application of Fama-French’s three-factor model to the Pakistani stock returns. We find that the special features in Pakistan significantly affect size and value factors and also influence the explanatory power of the three-factor model. Additionally, the paper examines the ability of the three factors to predict the future growth of Pakistan’s economy. Using monthly data of both financial and non-financial companies between 2002 and 2016, the article empirically investigates and finds that: (1) size and book-to-market factors exist in the Pakistani stock market, two mimic portfolios SMB and HML generate a return of 9.15% and 12.27% per annum, respectively; (2) adding SMB and HML factors into the model meaningfully increases the explanatory power of the model; and (3) the model’s factors, except for value factor, predict future gross domestic product (GDP) growth of Pakistan and remain robust. Our results are robust across sub-periods, risk regimes, and under three different methods of constructing the factors. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
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275 KiB  
Article
Stochastic Dominance and Omega Ratio: Measures to Examine Market Efficiency, Arbitrage Opportunity, and Anomaly
by Xu Guo, Xuejun Jiang and Wing-Keung Wong
Economies 2017, 5(4), 38; https://doi.org/10.3390/economies5040038 - 19 Oct 2017
Cited by 38 | Viewed by 6939
Abstract
Both stochastic dominance and Omegaratio can be used to examine whether the market is efficient, whether there is any arbitrage opportunity in the market and whether there is any anomaly in the market. In this paper, we first study the relationship between stochastic [...] Read more.
Both stochastic dominance and Omegaratio can be used to examine whether the market is efficient, whether there is any arbitrage opportunity in the market and whether there is any anomaly in the market. In this paper, we first study the relationship between stochastic dominance and the Omega ratio. We find that second-order stochastic dominance (SD) and/or second-order risk-seeking SD (RSD) alone for any two prospects is not sufficient to imply Omega ratio dominance insofar that the Omega ratio of one asset is always greater than that of the other one. We extend the theory of risk measures by proving that the preference of second-order SD implies the preference of the corresponding Omega ratios only when the return threshold is less than the mean of the higher return asset. On the other hand, the preference of the second-order RSD implies the preference of the corresponding Omega ratios only when the return threshold is larger than the mean of the smaller return asset. Nonetheless, first-order SD does imply Omega ratio dominance. Thereafter, we apply the theory developed in this paper to examine the relationship between property size and property investment in the Hong Kong real estate market. We conclude that the Hong Kong real estate market is not efficient and there are expected arbitrage opportunities and anomalies in the Hong Kong real estate market. Our findings are useful for investors and policy makers in real estate. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
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Review

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51 pages, 751 KiB  
Review
Review on Efficiency and Anomalies in Stock Markets
by Kai-Yin Woo, Chulin Mai, Michael McAleer and Wing-Keung Wong
Economies 2020, 8(1), 20; https://doi.org/10.3390/economies8010020 - 12 Mar 2020
Cited by 26 | Viewed by 29059
Abstract
The efficient-market hypothesis (EMH) is one of the most important economic and financial hypotheses that have been tested over the past century. Due to many abnormal phenomena and conflicting evidence, otherwise known as anomalies against EMH, some academics have questioned whether EMH is [...] Read more.
The efficient-market hypothesis (EMH) is one of the most important economic and financial hypotheses that have been tested over the past century. Due to many abnormal phenomena and conflicting evidence, otherwise known as anomalies against EMH, some academics have questioned whether EMH is valid, and pointed out that the financial literature has substantial evidence of anomalies, so that many theories have been developed to explain some anomalies. To address the issue, this paper reviews the theory and literature on market efficiency and market anomalies. We give a brief review on market efficiency and clearly define the concept of market efficiency and the EMH. We discuss some efforts that challenge the EMH. We review different market anomalies and different theories of Behavioral Finance that could be used to explain such market anomalies. This review is useful to academics for developing cutting-edge treatments of financial theory that EMH, anomalies, and Behavioral Finance underlie. The review is also beneficial to investors for making choices of investment products and strategies that suit their risk preferences and behavioral traits predicted from behavioral models. Finally, when EMH, anomalies and Behavioral Finance are used to explain the impacts of investor behavior on stock price movements, it is invaluable to policy makers, when reviewing their policies, to avoid excessive fluctuations in stock markets. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
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