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Hidden Market Anomalies: Why Do Some Stocks Outperform Expectations?
In financial markets, the efficient markets hypothesis (EMH) has gained considerable attention, arguing that asset prices in the market incorporate all available information. According to this theory, the likelihood of sustained market outperformance is extremely low because asset prices should adjust only as new information becomes available. However, in reality, there are some stocks that perform beyond expectations, which has led to thinking and questioning about EMH.
Many researchers have found that market anomalies exist and that these anomalies challenge the core ideas of EMH, forcing us to reassess how markets work.
Foundations of the Efficient Markets Hypothesis
The theoretical background of the efficient market hypothesis appeared as early as the beginning of the 20th century. The randomness of market prices was first described by French mathematician Louis Bachelier in his doctoral thesis. EMH emphasizes that when information is fully transparent, stock prices will react quickly and future price fluctuations cannot be predicted through historical data.
Market anomalies and their influencing factors
Although the EMH provides a framework for the operation of financial markets, over time, more and more market anomalies have been discovered. Research over the past few decades has shown that the performance of particular stocks appears to be influenced by other factors, such as company fundamentals, investor sentiment and market conditions.
For example, small-cap stocks and stocks with low price-to-earnings ratios (P/E ratios) often provide excess returns over the long term, a phenomenon that is difficult to explain using the traditional capital asset pricing model (CAPM).
The perspective of behavioral finance
Compared to EMH, behavioral finance emphasizes the psychological factors of investors. In this framework, factors such as emotions, overconfidence and groupthink can lead to irrational fluctuations in asset prices. Research by renowned economists Daniel Kahneman and Richard Thaler has shown how these psychological biases can influence investor decision-making.
Reflections on market efficiency
More and more investors and scholars are questioning the absoluteness of EMH. Some successful investors, such as Warren Buffett and George Soros, take advantage of so-called "market undervaluations" to generate returns. Their experience challenges the conventional view that market prices reflect all information.
Challenges to CAPMIn his famous speech "Successful Investors", Buffett pointed out that many undervalued stocks in the market have overlooked potential, which is the key to long-term successful investment.
Under the challenge of EMH, the capital asset pricing model (CAPM) has also been questioned. Many studies have shown that based on the risk-adjusted assumption, CAPM cannot explain certain abnormal phenomena, leading scholars to gradually turn to more complex frameworks such as the Fama-French three-factor model to explain market behavior.
Future Market Observation
With the advancement of technology and changes in the market environment, market anomaly research will continue to attract attention in the future. In particular, the application of artificial intelligence and big data analysis may bring new insights into the understanding of market efficiency.
ConclusionAs the London Business School researchers point out, the proliferation of AI players could lead to market prices increasingly reflecting all available information, thus providing new support for the EMH.
In summary, while the efficient markets hypothesis has a place in financial theory, hidden market anomalies continue to challenge our understanding of how markets work. Many investors are still trying to understand the reasons behind these anomalies in order to find a way to succeed in turbulent markets. In today's financial environment, do you believe that markets are truly fully efficient?
