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Anomalies and Market Efficiency


G. William Schwert


University of Rochester - Simon Business School; National Bureau of Economic Research (NBER)

October 2002

Simon School of Business Working Paper No. FR 02-13

Abstract:     
Anomalies are empirical results that seem to be inconsistent with maintained theories of asset-pricing behavior. They indicate either market inefficiency (profit opportunities) or inadequacies in the underlying asset-pricing model.

The evidence in this paper shows that the size effect, the value effect, the weekend effect, and the dividend yield effect seem to have weakened or disappeared after the papers that highlighted them were published. At about the same time, practitioners began investment vehicles that implemented the strategies implied by some of these academic papers.

The small-firm turn-of-the-year effect became weaker in the years after it was first documented in the academic literature, although there is some evidence that it still exists. Interestingly, however, it does not seem to exist in the portfolio returns of practitioners who focus on small-capitalization firms.

All of these findings raise the possibility that anomalies are more apparent than real. The notoriety associated with the findings of unusual evidence tempts authors to further investigate puzzling anomalies and later to try to explain them. But even if the anomalies existed in the sample period in which they were first identified, the activities of practitioners who implement strategies to take advantage of anomalous behavior can cause the anomalies to disappear (as research findings cause the market to become more efficient).

Number of Pages in PDF File: 54

Keywords: Market Efficiency, Anomaly, Size Effect, Value Effect, Selection Bias, Momentum

JEL Classification: G14, G12, G34, G32

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Date posted: October 22, 2002  

Suggested Citation

Schwert, G. William, Anomalies and Market Efficiency (October 2002). Simon School of Business Working Paper No. FR 02-13. Available at SSRN: http://ssrn.com/abstract=338080 or http://dx.doi.org/10.2139/ssrn.338080

Contact Information

G. William Schwert (Contact Author)
University of Rochester - Simon Business School ( email )
Carol Simon Hall 3-110L
Rochester, NY 14627
United States
585-275-2470 (Phone)
585-461-5475 (Fax)
HOME PAGE: http://schwert.ssb.rochester.edu
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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