Rodney the researcher theorizes that people become pessimistic on Friday the thi

Question

Rodney the researcher theorizes that people become pessimistic on Friday the thirteenth. Consequently, he studies the data on the stock market to see what happens to the average return on Friday the thirteenth for the last 40 years. He finds that the return is slightly lower than average on those days, even accounting for risk through the CAPM or the APT. Is this an anomaly? Now consider Danny the data digger. He looks at the average return on each day of the month, comparing the average return on the first of the month with that on the second, then the third, and so on, through the thirty-first. He finds that the returns are lower than average on the thirteenth (just like Rodney) and higher than average on the twenty-seventh. Whose evidence is more convincingly an anomaly, Rodney’s or Danny’s?

Explanation / Answer

Anomalies lead to abnormal returns and present a challenge to the semi strong form of efficient market hypothesis. This is because some these pattern are based on financial reports. More often abnormal returns are made but it is predictable. If stock prices are not predictable even after adjusting for risk then market anomalies does not exists.

In the first case the stock prices are slightly lower than the actual after adjusting for risk through CAPM and APT. Thus, the market anomalies exist.

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