Stock Price Anomalies

Stock Price Anomalies

  • Submitted By: dji123
  • Date Submitted: 02/21/2014 11:34 PM
  • Category: Science
  • Words: 483
  • Page: 2
  • Views: 91

The projects will examine stock price dynamics and anomalies, which are unable to be explained by the efficient market hypothesis (EMH) and the random walk theory. An individual stock or the whole market may be regard as a system. The price change was a consequence of the global state of the system, not just simply triggered by a random event. Technical analysis patterns and strategies will be used for empirical studies to these anomalies.

The efficient market hypothesis and the random walk theory have provided the basis for a great deal of research in financial economics. Under the efficient market hypothesis prices should fully reflect new information. In practice, however, this may not be the case. The extreme price movements often occur with little or no news. Price volatility is strongly corrected. Prices may not accurately reflect rational valuation. This suggests that markets have nontrivial internal dynamics.

In the real-world stock markets, stock prices change does not necessarily have positive correlation with new information, such as news, company earnings announcement, economic reports, FOMC (Federal Open Market Committee) meeting announcement etc. Investors may find some facts that he stock prices decline despite good earnings reports being released, and vice versa. Some studies have showed that over longer time periods, the statistical correlation between the quarterly change of real U.S. GDP (gross domestic product) and the S&P 500 is virtually zero. Price trend and technical analysis patterns may provide some explanations and evidences to these puzzles.

It is commonly believe that any past price information and patterns that predict the future will already have been identified and arbitrage out of existence by people taking advantage of them. However, price patterns do exist and have not been arbitraged out, at least for the short-term time period. The aggregated actions of market participants create these patterns. When many...

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