Efficient Market Hypothesis(Fama's Anomaly) in Indian Share Market

Efficient Market Hypothesis (Anomaly‐A) 

Efficient Market Hypothesis (EMH): In the non-investing world, an anomaly is a

strange or unusual occurrence. In financial markets, anomalies refer to situations when a security or group of securities performs contrary to the notion of efficient markets, where security prices are said to reflect all available information at any point in time. At a fundamental level, anomalies can only be defined relative to a model of “normal” return behaviour. Fama (1970) noted this fact early on, pointing out that test of market efficiency also jointly test a maintained hypothesis about equilibrium expected asset returns. Thus, whenever someone concludes that a finding seems to indicate market inefficiency, it may also be evidence that the underlying asset-pricing model is inadequate. Anomalies could be fundamental, technical, or calendar related. Fundamental anomalies include value effect, small-cap effect (low P/E stocks and small cap companies do better than index on an average) and the Low volatility anomaly. Calendar anomalies involve patterns in stock returns from year to year or month to month, while technical anomalies include momentum effect. Following anomalies have been studied in the Indian Stock Market1) Size effect: Small firms earn higher return in comparison to large firms

2) Value effect: High BV/P or low P/E stocks earn higher return in comparison to low BV/P or high P/E stocks 3) Momentum effect: If a stock has performed well in the recent past it will perform better in the future period

4) 52 week high effect: Stocks that are priced closest to their 52 week high will outperform those whose prices are furthest from their 52 week high.

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Efficient Market Hypothesis (Anomaly‐A) 

Anomaly 1 : Size Effect Size effect: Small firms earn higher return in comparison to large firms.

The first stock market anomaly is that smaller firms (that is, smaller capitalization) tend to outperform larger...