Anomalies are deviations from the prediction of efficient markets theory.

Such anomalies manifest in

predictable nonzero risk-adjusted returns (RAR). A stock with zero risk-adjusted returns provides a fair
return for its risk. A stock with positive (negative) risk-adjusted returns provides a more-than-fair (less-
than-fair) return for its risk. Investors would like to be long the former and short the latter.

One subset of the literature explores whether the anomaly in question is real. The ostensible anomaly may
be: an artifact of mismeasured risk; a result of mismeasured statistical reliability; or a result of data
snooping.

A real anomaly is one that can be profitably exploited by investors to earn statistically reliable and
positive risk-adjusted returns. Identifying a real anomaly, therefore, requires ensuring that the risk of the
investment strategy is correctly measured (for proper risk adjustment), and that the RARs are statistically
reliable and expected to persist out of sample. And we discussed ten anomalies which are as follows:

Price to Earnings Ratio Anomaly

The predictability of abnormal return after the firms announce their earnings has become common but
significant anomaly in the market. This anomaly was first identified by the Nicholson (1960) who
documented that firms with low P/E ratio earn higher return than the firm with high P/E ratio which
contradict the theory of efficient market presented by Fama. According to EMH prices reflects all
available information and no one can beat the market on the basis of privilege information because in
market everyone have same level of information. The statement stock with low P/E ratio tends to earn
higher earning than vice versa firms has emerged in the academic world commonly known as P/E
Effect.Nicholson (1960) in his paper further documents that firm with low book to market ratio not only
performed well in return perspectives for long period of time but also beat the market. He called the
different of returns on basis of low P/E as Value Premium. After the study of Nicholson the discussion
get started for use of P/E ratio for prediction of return. Miller &Widmann (1966) has also supported the
findings of Nicholson (1960) by documenting that P/E Effect is significant predictor for semi-strong form
of efficiency as on the basis of which we can estimates the return. The EMH contradict the chances of
earning excess return on predictable basis. The findings of Basus also confirm the findings of Nicholson
(1960) by presenting explanation that existence of P/Eanomaly is because of the overstated expectation
of investors that not get incorporated into the prices of stock as faster as suggested by the EMH. He
further says that the incorporation of information into prices is gradual process so it will take time and the
abnormal return on the basis of P/E ratio also reflects this adjustment.
 Momentum Anomaly

A very great number of literatures suggest various factors on the basis of which stock return can
be predicted. Among these anomalies the effect of return momentum is which is known as
momentum effect is also difficult to express within existing framework of traditional risk based
model. The momentum anomaly indicates that what was the strong growth in the previous period
will remain same in the near future. If a stock has outperformed in the past three to twelve month
it will continue in the near future. Number of the studies can be traced on the US data, and also
in other developed and emerging economies. This is most of the investigated effect with great
level of persistency in this momentum effect. This effect is strongly supported by the academic
studies because it is relevant to trading behaviors of investors like herding behavior, the under
and overreaction of investors and confirmation bias.

Another possible explanation of momentum effect is that momentum profit may be due to under
reaction of stock market to earning announcements. For example, if a firm releases good news
and the stock price only reacts partially to the good news, then buying the stock after the initial
release of the news will generate profits. If we study the historical evidences reading momentum
effect we can found that momentum strategies have yielded a lot of profit over last 60 years in
only in the US but also in the other parts of world like developed economies excluding the Japan
where there is insignificant or very week momentum effect. In the case of under or overreaction
of stock prices to new information the trading strategies that will choose the stock on the basis
will exist in the future. In this regard DeBondt and Thaler (1985) investigated the expected
return of loser and winner stock and come to the conclusion that winner stock has more return
than the loser stock.

REFERENCES

Klein, R. W., &Bawa, V. S. (1977).The effect of limited information and estimation risk on optimal
portfolio diversification. Journal of Financial Economics, 5(1), 89-111.
Banz, R. W. (1980). Limited diversification and market equilibrium: An empirical analysis. University of
Chicago, Joseph Regenstein Library, Department of Photoduplication.

Dimson, E. (1979). Risk measurement when shares are subject to infrequent trading. Journal of Financial
Economics, 7(2), 197-226.

Scholes, M., & Williams, J. (1977).Estimating betas from nonsynchronous data. Journal of financial
economics, 5(3), 309-327.

Lee, C. W. (1988) The stock price behavior and the size effect: An empirical investigation of the Taiwan
stock market, unpublished PhD dissertation, National Chengchi University (Taipei, Taiwan, ROC).

Chou, S. R. (1989). An empirical analysis of stock market anomalies: Evidence from the Republic of
China in Taiwan. publisher not identified.

Ma, T., & Shaw, T. Y. (1990).The relationships between market value, P/E ratio, trading volume and the
stock return of Taiwan Stock Exchange. Pacific-Basin capital markets research, 1, 313-335.

Size Anomaly

The size anomaly refers to the concept that there exists the adverse association return and market value of
the firm common shares. Banz (1981) was first person in this regard who found this anomaly in the US
returns. He reported that the performance of small firm is greater than the performance of large firm. The
literature presents mixed results regarding impact of size anomaly over the returns of small and large
firms. The study of Lee (1988) suggests that large firm outperform than small firm in earning perspective.
He used monthly return in order to compute the beta and find that the beta of the five portfolios is
different from each other. The findings of study of Lee (1988) are completely different and contrary with
the findings of Banz (1981) who used the data of US and find that small firm outperform in the market
than the large firms. In the same way the study of Chou and Johnson (1990) also confirms the findings of
Lee (1988) by concluding that there is no discernible difference between the earnings of small and large
firms. He has conducted study by using the data of Taiwan stock exchange. On the other hand the study
of Ma and Shaw (1990) confirm the study of Banz (1981) by concluding that smaller firm earn abnormal
than the large firms by using the data from 1979 to 1986. The results of size anomaly also get change
when we change the method of estimation of beta as when beta is calculated with the method of Dimson
(1979) and the Scholes and Williams (1977) there occur significant different between returns of small
and large firms. But the Banz (1981) syays that the size effect is not stable over the time and there is no
theoretical expalanation of such effect. We unable to answer the question that either size itself is factor or
it could be used as proxy for different unknown factors that are correlated with the size. One possible
explanation of size effect can traced from the model of Klein and Bawa (1977) who reports that if the
information regarding pertinent security the investor will not hold that security because of risk associated
with particular security.

Volatility Anomaly

The low-volatility anomaly is that portfolios of low-volatility stocks have produced higher risk-adjusted
returns than portfolios with high-volatility stocks. This anomaly was firstly identified by Black (1972)
who presented the early theoretical interpretation of why low-risk stocks might do so well relative to
high-risk stocks. He showed that a delegated agent mispricing arising from such borrowing restrictions as
margin requirements might cause low-beta stocks to outperform. the low-volatility anomaly is likely due
to mispricing, perhaps associated with an imperfection such as investor irrationality connected with
idiosyncratic volatility. In the case of mispricing, the profit opportunity may be ephemeral as investors
come to understand their cognitive error. Or it could be a more lasting mispricing, supported over time by
the high costs of arbitraging away the anomalous returns. Some researchers like Li, X., Sullivan, R. N., &
Garcia-Feijo (2016) suggest that low-volatility anomaly is not due to some systematic risk factor and
there is no return premium associated with a factor formed on the basis of volatility. These findings
suggest that the abnormal returns identified in the literature cannot be viewed as compensation for
systematic risk. Put differently, we found that the pricing of the characteristic itself can better explain the
outperformance of low-volatility stocks, suggesting a market mispricing. low-volatility stocks and selling
previously high-volatility stocks has historically generated substantial abnormal returns in US and
international markets. For the systematic risk explanation of the low-volatility anomaly to be valid, stocks
with a high loading on the low-volatility factor should outperform stocks with a low loading on the low-
volatility factor. This pattern should be observed irrespective of the absolute level of stock volatility. If,
however, after controlling for the observed level of return variability, loadings on the low-volatility factor
are unable to explain cross-sectional stock returns, we can reasonably conclude that the low-volatility
anomaly is consistent with market mispricing.
 Growth Anomaly

Growth in capital expenditures also explains returns to portfolios and the cross section of future stock
returns is known as growth anomaly (Anderson & Garciafeijo, 2006). Evaluate the investment growth
anomaly founded on the evolution of company traits round FamaFrench worth-growth classifications
(Anderson and Garcia-Feijo, 2006). Xing (2008) finds the negative relationship between investment
growth and stock returns in both cross-sectional and time-series analyses. These two studies interpret that
the investment growth anomaly is risk-based. Cooper, Gulen, and Schill (2008) find a significant asset
growth effect in the cross-section of stock returns. Stocks in the low asset growth deciles outperform
while stocks in the high asset growth deciles underperform in the following years, generating a substantial
return spread for the hedging portfolio. This cross-sectional return pattern has generated much research
interest and is often investigated as a significant new anomaly. Cooper, Gulen, and Schill (2008) argue
that the asset growth anomaly is most consistent with investor over extrapolation of past gains to growth.
Chan, Karceski, Lakonishok, and Sougiannis (2008) show that the anomaly is more pronounced in firms
with low past profitability and poor corporate governance, and suggest that it is due to investors under-
reaction to managers empire-building investments. Lipson, 6 Mortal, and Schill (2011) show that the
anomaly is more evident in stocks with high idiosyncratic volatility and argue that costly arbitrage is the
driving force behind the anomaly.

Anderson, C. W., & Garciafeijo, L. U. I. S. (2006).Empirical evidence on capital investment, growth

options, and security returns. The Journal of Finance, 61(1), 171-194.

Xing, Y. (2008). Interpreting the value effect through the Q-theory: An empirical investigation. Review of
Financial Studies, 21(4), 1767-1795.

Cooper, M. J., Gulen, H., &Schill, M. J. (2008).Asset growth and the crosssection of stock returns. The
Journal of Finance, 63(4), 1609-1651.

Lipson, M. L., Mortal, S., &Schill, M. J. (2012).On the scope and drivers of the asset growth
effect. Journal of Financial and Quantitative Analysis, 46(06), 1651-1682.

Chan, L. K., Karceski, J., Lakonishok, J., &Sougiannis, T. (2008).Balance sheet growth and the
predictability of stock returns. University of Illinois at Urbana-Champaign working paper.
 Accrual Anomaly

Accrual anomaly is documents the inefficacy of the stock market as the stock market efficiency
theory suggest that prices reflect all available information so no one have privilege information
on the basis which he can beat the market. Sloans (1996) was the first person who identifies the
accrual anomaly by taking the data from period of 1962 to 1991. In simple Accrual anomaly
means that " investors fixate too heavily on corporate earnings and not on cash generation. He
ranked all the companies on the ground of their ratio of accruals by taking the data of their last
year earnings. He statistically measured the performance of their shares after announcement of
past year results.He found that there is negative significant relationship between the non-cash
component of earnings and return of the firm. Most of the research regarding accrual suggest that
investors strongly react (Collins et al., 2003) by making less amount of investment in large
accrual companies and large amount of investment in companies with less high accruals. So this
strategy is executed by the investors in order to exploit the accrual opportunity available in the
market. In general, by doing so the investors will make the prices towards their mean values as
said under the mean reversion theory. Such type of activities can also be traced from the
arbitrager as he enter in the market for short period of time in order to capture the opportunity in
the market but when prices divert towards the mean value then get back from the market. In
directly arbitrager divert the prices towards the mean values. This anomaly may remain in the
market for short and long period of time. Some may expect and believe that when accrual
anomaly is in the market investors will enter in the market and anomaly will be disseminated but
this is not simple like this as the study of Bushee and Raedy (2003) documents that accrual
anomaly not only remain in the market but it magnitude has not been diminish over the time. So
this suggests that the magnitude and time of anomaly is most important thing.

Corporate Governance Anomaly

The strength of company governance systems impacts the desired supply of financing, which in flip
facilitates to provide an explanation for future return is known as corporate governance anomaly.
Managers who wish to undertake low return investments in countries with strong corporate governance
systems accordingly prefer to rely on internal cash flows to finance these investments, managers making
similar investments in countries with weak corporate governance systems are freer to use the equity
market as a source of finance. So because of this differences in corporate governance structures explain
both differences in the sources of finance for investment across countries and differences in the returns on
investment. Modest reforms like stronger accounting standards and better enforcement of contracts can
have a significant impact on return. Such reforms should be feasible for both developed and developing
countries regardless of the origins of their legal system. These reforms are the part of corporate
governance. Market with strong code of corporate governance leads to more incorporation of information
into stock prices (Ferreira and Laux, 2007). In the same fashion (Kanagaretnam, Lobo & Whalen, 2007)
demonstrate that strong corporate governance shrink the information asymmetry. There is low level of
tendency in the movement of stock prices has been observed with the institutional development where
rule of law and strong property rights prevails (Hasan, Song &Wachtel, 2014). The pattern
of shareholding also has great influence over variation of stock prices. As Boubaker, S., Mansali&Rjiba,
(2014) Excess of shareholding enhance the stock price co-movement because excess holding reduce the
inflow of information into the market. The political events like government fraud, labor strikes,
institutional reform and fluctuation in the policy of government has great impact on business environment
of the country. Further argued that political instability has adverse impact on growth of equity market
asit enhance the uncertainty regarding policies of state which in results has impact on economic decisions
(Asteriou, &Siriopoulos, 2000). All these things contribute to corporate governance anomaly.

Asteriou, D., &Siriopoulos, C. (2000). The role of political instability in stock market development and
economic growth: The case of Greece. Economic Notes, 29(3), 355-374.

Boubaker, S., Mansali, H., &Rjiba, H. (2014). Large controlling shareholders and stock price
synchronicity. Journal of Banking & Finance, 40, 80-96.

Hasan, I., Song, L., &Wachtel, P. (2014). Institutional development and stock price synchronicity:
Evidence from China. Journal of Comparative Economics, 42(1), 92-108.

Kanagaretnam, K., Lobo, G. J., & Whalen, D. J. (2007). Does good corporate governance reduce
information asymmetry around quarterly earnings announcements?. Journal of Accounting and Public
Policy, 26(4), 497-522.

Ferreira, M. A., &Laux, P. A. (2007). Corporate governance, idiosyncratic risk, and information
flow. The Journal of Finance, 62(2), 951-989.
 Liquidity Anomaly

Amihud and Mendelson (1986) was first who person who identify the effect of liquidity. The correlation
among liquidity and property return is associated with the hypothesis of buyers' aversion to risk.
Investors with risk aversion require higher returns as compensation for better threat degrees. Inside the
same way, they have a tendency to have a preference for concentrating their investments in liquid
property, which may be negotiated quickly and at a low transaction price. As a result, which will attract
the buyers, the property with lower liquidity shall provide a extra anticipated return. In summary, the
predicted returns of the property are a decreasing characteristic of liquidity (Amihud&Mendelson, 1986).

Liquidity is an elusive concept, most market participants agree that liquidity generally reflects the ability
to quickly buy or sell sufficient quantities at low trading cost and without having a significant impact on
the market price. It has also been argued that due to the fact stocks of small businesses customarily have
fairly few tremendous shares of stock, few shares alternate at any designated time, which makes the
shares rather illiquid. Illiquidity raises bid/ask spreads, which raises chance, and consequently, such
shares command a bigger threat top rate as compensation. Earlier than we go any extra, we must
evidently outline what we simply by way of liquidity and description how to measure it. Liquidity is
almost the extent to which a share will also be bought or sold without affecting the proportion rate. If a
inventory may also be traded conveniently, it's more liquid. There are a few approaches to measure this,
however for now, lets stick to:

Share-turnover: that is calculated with the aid of dividing the complete number of shares traded over a
period via the normal number of shares extremely good. The larger the share turnover, the more liquid the
proportion of the organization.

Bid-Ask spread: The Bid-offer spread, also known as the Bid-Ask unfold, relates to the quote of the price
at which contributors in a market are inclined to purchase or promote a inventory or safety. The bid rate is
the price at which a social gathering is inclined to buy, at the same time the ask (or offer) price is the price
at which any person is willing to promote. The broader the unfold, the extra illiquid the stock.

Trading volume pattern: This does what it says on the tin. If a share if fitting much less liquid, it has a
negative buying and selling quantity development.
Amihud, Y., &Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial
Economics, 17(2), 223-249.

Book to Market Anomaly

The Book-to-Market effect is probably one of the oldest effects which has been investigated in financial
markets. It compares book value of company to price of the stock - inverse of P/B ratio. The bigger the
book-to-market ratio is, the more fundamentally cheap is the investigated company. Book-to-Market
wasnt even considered as a market anomaly at the beginning of the century when Ben Graham famously
popularized its use. The ratio lost some of it popularity when the Efficient Market Theory and CAPM
became main Wall Street theories, but it gained back its position after several studies have shown the
rationality of using it. This anomaly is well-described in the classical fama and French research paper
(1993). Additional details are calculated from data which are presented in Kenneth French paper.

Pure value effect portfolios are created as long stocks with the highest Book-to-Market ratio and short
stocks with the lowest Book-to-Market ratio. However, this pure value effect has substantial drawdown
with more than 50% drawdown in the 1930s. Value factor is still a strong performance contributor in long
only portfolios (formed as long stocks with highest Book-to-Market ratio without shorting stocks with
low Book-to-Market ratios).

Jason C .Hsu (2014) established that the active shares of traditional value style indices are dominated by
industry bets. They also capture less than the entire value premium because, weighting constituent son the
basis of capitalization, they tend to hold large positions in over priced stocks and small position sinunder
priced (i.e., value) stocks. Smart beta strategies, in comparison, are better diversified, and they
systematically buy low and sell high by periodically rebalancing to non-price related target weights .In
addition to exploiting mean reversion in prices, smart beta strategies profit from mean reversion in the
value premium by effectively implementing a dollar cost averaging program.

Institutional Investors Anomaly

Lewellen (2011) argues that institutional investors hold the market portfolio and fail to take advantage of

well-known anomalies. Edelen, Ince and Kadlec (2015) Discover that institutional buyers boom their

holdings of overpriced shares and reduce their holdings of underpriced shares and consequently may be a

likely source of anomalies. Investor overconfidence has been advanced as a plausible explanation for
excessive trading volumes. Odean (1998) investigated how overconfidence may influence security price

changes and trading volumes under three market settings, namely, price-takers, insiders and market

makers with costly information, that principally differ in how information is distributed. In all three

market settings, the presence of overconfident trader increases expected trading volume, a result that

provides the theoretical linkage between overconfidence and trading volume. Odean (2001) predicted that

investors who have experienced high past returns will be more prone to overconfidence The extent

research has found that stocks with lower turnover rate tend to outperform their high turnover

counterparts by a wide and statistically significant margin. Odean (1998) theorized that the overconfident

traders tend to drive up expected trading volume. Some empirical findings documented that individual, or

retail, investors tend to be overconfident after experiencing recent gains, which in turn leads to below

market returns subsequently. Other empirical evidence suggested that institutional investors tend to herd

on private information, while herding in individual investors tends to be driven by overconfidence.

Therefore, the possibility that turnover premium may vary inversely with the degree of foreign

institutional investing. The notion that the degree of foreign institutional participation in a stock varies

inversely is supported by the data. In general, low turnover premium is confined to those stocks with little

interest from foreign institutional investors. Further, the source of turnover premium appears to arise from

low turnover stocks that exhibit positive and significant average excess returns. In contrast, the average

excess returns for high turnover stocks are often indistinguishable from zero. The investment decisions of

local investors were substantially influenced by overconfidence, and that the presence of foreign

institutional investors partially remedied the consequences induced by investor overconfidence. Yates et

al. (1996, 1997, 1998), suggested that Asians may be overconfident in general knowledge as well as in

making probabilistic assessment. Although both institutional and individual investors were found to trade

more aggressively following market gains, the latter were more prone to trade in riskier securities than the

former. The evidence therefore supported the notion that individual investors are more overconfident than

their institutional counterpart.