Investing in Stock Market Anomalies

50 Pages Posted: 1 Feb 2012 Last revised: 27 Feb 2012

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Stephen J. Brown

New York University - Stern School of Business

K. Ozgur Demirtas

Sabanci University Graduate School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: January 31, 2012

Abstract

For the last three decades, one of the most extensively investigated topics in financial economics is the crosssectional variation in stock returns. There are certain patterns in equity portfolios that are considered as anomalies because they cannot be explained by well-known asset pricing models. Each year billions of dollars are invested in portfolios based on anomalies which identify undervalued assets with high expected returns and overvalued assets with low expected returns. However, classical selection rules in financial economics fail to explain this investment behavior. This paper utilizes the almost dominance rules to examine the practice of investing in stock market anomalies. The results indicate that popular investment choices such as value and small stocks do not dominate growth and big stocks, whereas, the short-term reversal and momentum strategies create efficient investment alternatives. The relative strength of undervalued assets becomes more prevalent when the time-varying conditional distributions and broader portfolio comparisons are examined. Hence, the paper solves the wide inconsistency between the common practice in mutual and hedge funds’ asset allocation decision and modern portfolio theory by providing an explanation of investing in an expected utility paradigm.

Keywords: Mutual funds, equity portfolios, expected utility paradigm, stock market anomalies

JEL Classification: G10, G11, G12

Suggested Citation

Bali, Turan G. and Brown, Stephen J. and Demirtas, K. Ozgur, Investing in Stock Market Anomalies (January 31, 2012). Available at SSRN: https://ssrn.com/abstract=1996681 or http://dx.doi.org/10.2139/ssrn.1996681

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

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Stephen J. Brown

New York University - Stern School of Business ( email )

Stern School of Business
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K. Ozgur Demirtas

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

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