CMA Final · Strategic Financial Management · Efficient Market Hypothesis
Which of the following is a recognised market anomaly that challenges the Efficient Market Hypothesis?
The January effect is the recognised anomaly. Small-cap stocks have tended to earn abnormally high returns in January, which is a predictable pattern that conflicts with market efficiency, whereas random walks, fast news reaction and no serial correlation are consistent with it.
- ARandom walk of price changes
- BRapid price reaction to earnings news
- CJanuary effect, where small-cap stocks tend to show abnormally high returns in JanuaryCorrect
- DAbsence of serial correlation in daily returns
Explanation
The January effect is a calendar anomaly that suggests predictable abnormal returns. The other options describe behaviour consistent with efficiency.
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