What are Market Anomalies and why do they occur?

Boubacar Amadou Cisse

What makes exchange rates increase or decrease? What are stock exchanges and what are they for? We must have, at least once, pondered about these questions. These are simple subjects that a layperson asks himself and strives to understand. Economics and finance drive our daily life and it would be imperative to familiarize ourselves with some basic principles in these fields; one of them is a market anomaly.

To start with, an anomaly is something that deviates from the standard. In basic term, a market anomaly is a deviation from market standards; standards here refer to the theories and asset prices in the markets. You may still ask yourself what the relationship between market anomalies and our daily life is; the answer is everything.

For example, have you noticed that stock prices on Monday are significantly lower than those on Friday? In case stocks are unfamiliar to you, they are share (stakes) that you can purchase for companies in the stock exchange- a big virtual market for shares. Another example is the exchange rate; exchange rates against major currencies are lower on Mondays than Fridays. This is called the Weekend Effect, the Monday Effect or the Weekday's Effect. There are debates about the reasons behind this event but many opine that it is related to the behaviour of traders in the market. In other terms, in case you observe a constant appreciation of the US Dollar against your local currency within a week and think about exchanging the dollars in your hand, just do it at the end of the weekdays. Chances are the market will experience a slight depreciation on the following Monday.

Sometimes, there lie explanatory reasons behind certain anomalies. Another example of market anomaly is major Post-Holidays effects: Thanksgiving (Black Friday), Christmas and New Year. The most popular among these is Black Friday. There may rise numerous debates on the effect of this historic day being a market anomaly. However, one factor is sure: there has been an excess return on stock on that day. Black Friday is the first Friday after Thanksgiving in the United States. So basically, if you intend to sell your stocks, a few days after these major holidays might the best time. Furthermore, there are many other anomalies which may be unknown to many of us, since many people do not express their interest in financial markets. Among them, January Effect, September Effect, October, Small Firm Effect, Neglected Firms Effect and Low Book Value Effect can be cited.

Nowadays, in these open economies, the integration between people and finance is deep and unavoidable.  Most times, you may think that finance is only for experts and researchers in the field. The truth is no! Finance is a broad and dynamic field; it is one of the sectors that everyone uses, willingly or unwillingly. Some basic principles in finance directly affect our lives and we urgently need to learn about them so we can make informed financial decisions.