What is Anomaly?

Anomaly meaning refers to the phase when the results generated from the specific model are completely different from the results you predicted under specific assumptions. The anomaly suggests that a particular model is either new or super old. Market anomalies refer to the misrepresentation of the returns, while price anomalies occur when certain things have a varying price than what’s predicted. In market anomalies, January, as well as small cap effect, are quite normal.

In the small-cap effect, as the name suggests, the small organizations or the startups perform better than the large-scale companies. The January Effect can be described as the potential of the stock to generate better returns during January as compared to other months. Another common scenario when the anomalies are highly likely to occur is with the asset pricing models. Despite being generated using advanced and effective models, the CPAM does not do the best job when it comes to estimating the stock returns. However, the invention of CAPM definitely helps create a foundation for predicting market anomalies. Even though the model may not be a practical choice, there is no denying that it holds great importance.

January Effect

As mentioned earlier, this effect is another common type of market anomaly. It suggests that the stocks that have poorly performed in the last quarter of the financial year will perform well in the financial markets at the beginning of the next year, i.e. in January. Now, the surprising fact is that the January effect is quite practical. In fact, it is so logical that it would be hard to Call it an anomaly. That’s because professional investors are often willing to get rid of the poorly performing stocks in the final quarter of the year.

This is commonly referred to as tax-loss harvesting. The January effect makes stocks look more attractive and a profitable option to the investors in January. People know that investors do not want to get stuck with the tax-loss selling issues by Investing in the stocks in the final quarter of the year. That’s one of the main reasons that encourage the companies to get rid of the stocks in the fourth quarter. Selling pressure is quite high in the final quarter, while the buying pressure outperforms this after the first of January. This leads to the January Effect phenomenon.

Like the January effect, there is the September and October Effect in the investment markets. The general theory related to the September effect suggests that individuals return from the vacation during this time and they get ready for the gains. The efficient market supporters dislike the “days of the week” concept as they believe it isn’t only wrong but it is quite illogical. According to the studies, there is quite a great movement in the stocks on Friday. Even though it might not be a great inconsistency, the issue exists. However, if we see it from the practical view, we can’t find any reason why this fact must be accurate.