G/ICF/12. International corporate finance. Anomalies in testing for market efficiency.

´For a phenomenon to be an anomaly there has to be çconventional wisdom’ which is violated by the phenomenonŽ. We begin by defining the term market efficiency and its three forms. We, then go on to describing, the methodology of testing for market efficiency, which leads us to asset market anomalies. After describing some of the most common anomalies, we will try to explain why these appear to exist. We can conclude that bad-model problems are unavoidable. They seem to be more serious problem when it comes to measuring long-term abnormal profits rather than short-term abnormal profits. Different models produce different abnormal returns. Fama argues that with reasonable changes of models usually makes an anomaly to disappear, for example, the January and small stock effects. Using value weighting instead of equal weighting of returns when comparing firms with different sizes also improves the results and minimises the incidence of an anomaly.