Stock Market

anomalies
FIN 460 INVESTMENT MANAGEMENT

Submitted To Submitted By
Dr. Sarwar Uddin Ahmed
Md. Zahid Hossain
Director BBA Program and Head, Department of
International Business  ID- 1610393
Professor Course- fin460
Department of Finance, Section- 02
School of Business & Entrepreneurship
 Acknowledgement

I want to honor some individuals, who have assisted us throughout the process of preparing this
report. I am thankful and highly indebted to them for giving me a significant portion of their
valuable time. I also appreciate the effort of our faculty Dr. Sarwar Uddin Ahmed sir for
helping and guiding me all the way up to here and for providing me with ample opportunities to
give my best in this report. Without whom it could be a difficult job for us. It would be
impossible without his hard work on teaching all the student. Which gave us an inspiration to
improve our assignment by a Large margin and would have been incomplete without him. I
thank you all for your kindness, compassion, and support towards my report.
 Letter of transmittal

7th May 2021

Dr. Sarwar Uddin Ahmed

Professor

Department of Finance

School of Business

Independent University, Bangladesh.

Subject: Submission of report on Stock Market Anomalies (summer)

Dear Sir,

I would like to thank you for giving me the opportunity to work and complete my assignment
through the guidance of your lectures. This assigned task gave me the privilege to explore more
about Business International and how financial analysis can be a key factor to good investment
decisions. Once done with compiling the given data, and analyzing them, I have completed the
whole assignment according to your instructions.

I gave my best effort for the preparation of this report to satisfy the requirements and standards
set by you. However, I understand that shortcomings may be inevitable as we are still relatively
new in the field of business. I will be glad to clarify variations that may arise and will be looking
forward to your feedback to incorporate it in my future projects.

I would also like to express my gratitude to you for your support and kind consideration inside
and outside the classroom. I am truly grateful to have an instructor of your quality.

Yours sincerely,

Md. Zahid Hossain

ID- 1610393
Introduction
Anomalies refer to something that deviates from what is standard, normal, or expected.
When some exogenous variables influence the market without being present in the market
model that is called anomalies. An anomaly can be anything especially those that are related
to human behavior, thinking, environment, or anything unexpected. If these types of
exogenous variables indirectly influence people towards making some unexpected decisions
there will be changes in the stock market’s valuation. Observing the effects of anomalies are
very hard because of their unpredictability where many external variables are related to that
model. To understand the anomalies in a particular market long-term observations are must
needed. Because anomalies can occur anytime and it may not have a repetitive behavior.
Brokers and financial managers can use these uncommon market practices to influence the
market in a new direction. A market anomaly refers to the distinction in a stock's
presentation from its accepted value, as set out by the efficient market hypothesis which is
EMH. The presence of financial market anomalies gives proof that the EMH does not
generally remain constant, as not all applicable data is priced straight away or by any stretch
of the imagination. The Efficient Market Hypothesis (EMH) is that the proposition that
current stock prices fully reflect all available information about the worth of the firm which
there's no way to earn excess profits by using this information. The EMH has received an
abundance of attention since its inception. However, the evidence against the EMH is
growing, and various studies have documented return predictability. In fact, despite its
relative simplicity, this hypothesis has also generated considerable controversy. After all,
the EMH questions the power of investors to consistently detect mispriced securities. For
these reasons, scholars have recently been studying the calendar anomalies that are one
among the characteristics of monetary markets, and these anomalies are found to contradict
the EMH. In recent years, financial markets changed for globalization. Today, a good range
of investment opportunities is out there to investors. They could select different products in
diverse financial markets. In this new scenario, markets are related, but each of them has
specific characteristics with particular opportunities for investors. Investors differ in aims
and restrictions, which makes portfolio management choices more complex and dynamic.
Moreover, an investment decision should be opportunely modeled, as it is regarded as a
major and strategic choice. An investment decision could also be influenced by many
qualitative and quantitative factors in conflict with one other. Thus, portfolio management
decision may be a multi-criteria problem today, so it requires flexible and analytic decision
tools for investors. Anomalies should not occur and they definitely should not persist. No
one knows exactly why anomalies happen. People have offered several different opinions,
but many of the anomalies haven't any conclusive explanations. There seems to be a
chicken-or-the-egg scenario with them too - which came first is very debatable. It is highly
unlikely that anyone could consistently take advantage of exploiting anomalies. The first
problem lies within the need for history to repeat itself. Second, albeit the anomalies
recurred like clockwork, once trading costs and taxes are taken under consideration, profits
could dwindle or disappear. Finally, any returns will need to be risk-adjusted to work out
whether trading on the anomaly allowed an investor to beat the market. First, the efficient
market hypothesis assumes all investors perceive all available information in just an
equivalent manner. The different methods for analyzing and valuing stocks pose some
problems for the validity of the EMH. If one investor looks for undervalued market
opportunities while another evaluates a stock supported its growth potential, these two
investors will have already got received a special assessment of the stock's fair market
value. Therefore, one argument against the EMH points out that, since investors value
stocks differently, it's impossible to work out what a stock should be worth under an
efficient market. Secondly, no single investor is ever ready to attain greater profitability
than another with an equivalent amount of invested funds under the efficient market
hypothesis. Since they both have an equivalent information, they will only achieve identical
returns. But consider the wide selection of investment returns attained by the whole universe
of investors, investment , then forth. If no investor had any clear advantage over another,
would there be a variety of yearly returns within the open-end fund industry, from
significant losses to 50% profits or more? According to the EMH, if one investor is
profitable, it means every investor is profitable. But this is far from true. Secondly, no
single investor is ever ready to attain greater profitability than another with an equivalent
amount of invested funds under the efficient market hypothesis. Since they both have an
equivalent information, they will only achieve identical returns. But consider the wide
selection of investment returns attained by the whole universe of investors, investment ,
then forth. According to the EMH, if one investor is profitable, it means every investor is
profitable. But this is far from true. Thirdly under the efficient market hypothesis, no
investor should ever be ready to beat the market or the typical annual returns that all
investors and funds can achieve using their best efforts. This would naturally imply, as
many market experts often maintain, the absolute best investment strategy is simply to place
all of one's investment into an index fund.

Literature Review
After the normal assumptions of finance come under threat from variety of quarters, the
behavioral finance got the tutorial attention (Lo, 2005). Under uncertainty, investors’ decision
may vary from rational market behavior (ibid) and from the assumptions of the efficient market
hypothesis, which is named abnormality of monetary market (Latif, Arshad, Fatima, & Farooq,
2011). Numerous researches show that security returns answer variables associated with factors
like biorhythms, beliefs, social identity and even weather! For instance, Hirsh Leifer (2001),
Lucey and Dowling (2005) and Kamstra, Kramer, and Levi (2000) have shown that seasonal
variation and daylight savings time, biorhythms and disruptions in sleep affect the stock return.
Edmans, Garcia, and Norli (2007) have found even the loss of international competition by the
national soccer team cause significant decline available returns. Beside the knowledge
asymmetry among the investors, behavioral factors are also responsible for
the anomalies and disruptions of the stock markets of developing countries, those factors emerge
time to time within the type of stock market bubbles (Kapoor & Prosad, 2017). Therefore,
behavioral finance is an important perspective to see the efficiency of the stock markets of
developing countries. The major breakthrough occurs within the sector of behavioral finance
after the introduction of the prospect theory, which replaces the utility function of the expected
utility theory with the price function. This theory
assumes that losses and gains are valued differently and thus investors make decision supported
the perceived gain not supported the perceived losses. This development drives behavioral
finance to deal with the influence of psychological biases on the behavior of the investors and its
impact on the stock market. Psychological biases, e.g. herd behavior, overconfidence, mental
accounting, and loss aversion leads to the several financial anomalies. Therefore, behavioral
finance has become so critical that tons of people tend to forget the overall principles of
investment theory in analyzing investment decision and are guided by the intuition and other
criteria that conflict with rational investment theory (De Bondt,1998).

This study applies one perspective of behavioral finance that is the summer season in Bangladesh
on daily market return and trade volume data on DSE which is the dominant and the oldest stock
market in Bangladesh to measure the efficiency of the market. I general, the seasonal activities
play an important role in our lives, behavior & decisions of the mass people.

In our country the summer is a very extended season. For this reason, many seasonal businesses
rise in the stock market. People tend to buy new machines like air conditioner, cosmetics to
protect from the sun, mineral water companies sell the product more and more, drinking soda is a
very common thing. These kinds of activities make the company profitable. And investors invest
in these company more and more in summer. The transactions in these industries rise
significantly. Therefore, being in a hot country the summer season might have some influence in
our stock market. Calendar anomalies are cyclic earnings irregularities in which the series
is founded on the calendar. “The calendar time hypothesis states that the market behaves
differently at different hours of the stock exchange. Occasional anomalies have various names in
the writing like calendric anomalies or occasional anomalies. Occasional anomalies have been
concentrated to demonstrate whether the stock returns in the market have a sequential execution
than different days or times on a specific day, week, month, period or year.

As per the ordinary account models, no issues influencing the securities exchange costs other
than data influencing the stock value markets, sanity and organizations can be discussed; there is
a sort of comprehensiveness (Schramm and Nielsen, 2001, p. 405). Nonetheless, considers show
that at various time spans the stock cost, and consequently the profits, has some negative or
positive changes at various periods. These changes, called occasional anomalies, have prompted
a conversation of the legitimacy of the conventional models. At the point when concentrates on
this issue are analyzed, it is seen that intermittent anomalies are grouped under three
subheadings: anomalies identified with days, anomalies identified with months and anomalies
identified with occasions (Barak, 2008, pp. 126-127).
Data and methods
To study and analysis of this report on anomalies I have collected the data from the DSE indexes
which were previously from the year of 2010-2019. To find the effects of summer for 10 years in
our stock market I’ve selected the four months in a year. These months are April, May, June,
July. Because in our country usually these four months are the summer season.

Return: To calculate the return from the market index I’ve used the formula, (New Price of the
share – Old Price of the share)/Old Price of the share. This formula helped to find out the return
of each day from the market index.

Standard Deviation: SD indicates how far the value is spreading related to the mean. The further
the distance more risk will be considered in stock market. And the formula I used in my working
is: STDEV.S(Number1: Number n)

Variance: The formula is, VAR.S(Number1: Number n)

The purpose of using this variance and SD method is called risk measurement related to the
market return. It refers to the stock performance and the sensitivity within the market. Higher SD
value, Higher the risk which indicates high gain from that stock. And the variance helps to find
the SD value since SD depends on Variance in mathematics. In the stock market, these variables
play a vital role in terms of knowing about the market situations. It helps the investors to know
how many risks they are taking and when to avoid any unexpected scenario depends on the
investor's character. An investor can be a risk-averse or a risk lover. Financial managers and
brokers use these tools to know their stock’s performance. But in behavioral economics and
finance, many other external variables dictate the human decision that can influence the stock
market.

After that, I’ve calculated the average value of the market index which helped me to find the
influence of anomalies in DSE from 2010-2019. Though out the 10 years the average values of a
whole year and the average value of summer months in that year can be described as the
anomaly’s existence finding.
Findings
To find the anomaly’s existence I’ve constructed some graphs from considering the SD,
VARRINCE & the AVERAGE values of each year and the summer months of that year.

 Average:

6,000.00

5,000.00

4,000.00

3,000.00

2,000.00

1,000.00

-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Summer Whole Year

This graph shows that for the 10 years of stock observation the market performed well but in
summer months the average price decreased except 2011, 2012 & 2019. These 3 years in the
summer months the prices were higher than the normal scenario.

 Standard Deviation:

After putting the risk measure which is the SD values in the graph in terms of percentage. It
shows the risk differentiate though out the 10 years compared to summer months of each year.
 3.000000%

2.500000%

2.000000%

1.500000%

1.000000%

0.500000%

0.000000%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Summer Whole Year

This remind me something that the sudden growth and the gradually declining performance of
the DSE for couple of years when the stocks were performing well and generating high profit,
then gradually the market fell in lower value of risk measurement. From 2010 the SD of the DSE
raised in 2.97% from 1.811%. After that the SD values were decreasing continuously. In
summer of 2011 the stocks return fell dramatically due to the effect of summer. Though
determining the anomaly’s behavior is very complex, I can say that time in Bangladesh
something happened in the summer of 2011 DSE which led to fall in return of the stocks in DSE.
But in 2013, 2015, 2016 & 2019 the SD values were very high than each year’s SD.

 Variance:

To compare the variance, I’ve done the same type of graph like SD and average price index.
From this graph I can determine the movement of anomaly’s variance of each summer with the
comparison of 10 years variances.
 0.0010000

0.0009000

0.0008000

0.0007000

0.0006000

0.0005000

0.0004000

0.0003000

0.0002000

0.0001000

0.0000000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Whole Year Summer

From 2010 to 2012 the anomaly’s effect were gowning but from 2013- 2019there were
ups and downs but in general the effects of anomaly remain lower. In 2013, 2015, 2016 & 2019
the summer effects were higher than the market variance.

On the other hand, the variance of 2011 and 20125 were very high than the summer
month of those particular years. With comparison of summer and the whole year, in 2016 the
stock variance hit the lowest value of 10 years.

Discussion
After observing the Dhaka stock exchange for 10 years and the from the workings I’ve found
that there are some anomalies in stock market which comes suddenly and disappear. Based on
the market index and the summer effect on stock market it is clear that most of the time in
summer the stock market falls in Dhaka Stock Exchange. Though the reasons are not clear but
there are some clear points that stock prices fall, the returns fall in summer. Maybe it is caused
by summer holiday or the working shifts increasing tendencies which cannot be predicted earlier.
Most interesting observation is that the summer anomaly sometimes outperformed the whole
year’s value. The effect of the summer months is not repetitive but I can say that is generally in
summer the prices decreased in the market. Maybe in some industries cannot perform well due to
the character of their bussiness or their products. Like an ice-cream company cannot perform
well in winter, similarly winter cloths manufacturers also cannot sell their products in summer.
There are many more variables which influence the stock market which cause these anomalies
take places on human decisions. After all humans are influenced on their mood, belief,
environmental scenarios, assumptions and predeterminations. This behavioral difference also
exists in the Dhaka stock exchange.

One important point to be noted that general investors in our country are not that much educated
to conduct or read the stock market properly and they are very much influenced by the external
factors which impact the stock market noticeably. Dhaka stock exchange performed averagely in
10 years. In 2012 & 2013 the market index was lower in these 10 years. But in summer of these
two years surprisingly the index values were higher than the yearly value.

There are many factors affecting the changes in stock prices. Studies show that human
psychology has a significant effect on these price movements. In some cases, people can
overreact or underreact more than expected. At this point, stock investors can show more or less
reaction than expected to news in the market. This overreaction of investors to positive or
negative news in the market is called an overreaction response. Financial backers' eruption to a
stock makes stock costs rise more than typical, or decline from the ordinary, alongside the
securities exchanges' own control component, which permits the stock costs to stay at typical
value levels.

From my analysis of the 10 years changing in stock market, I can declare that some anomalies
must exist in our Dhaka Stock Exchange. The results from the data also shows that during
summer the stock market behave differently and maybe there are more anomalies which are
affecting the market without knowing their existence.
Conclusion
Behavioral finance, accepting that individuals are not altogether objective, attempts to sort out
the contrasts between the market esteem and the book worth of a resource. In other words, it
attempts to discover a technique to clarify the contrasts between costs. Uncovering the market
anomalies that can't be clarified by the Efficient Market Hypothesis and ordinary hypotheses,
conduct finance gives proof to see if these hypotheses are adequate or not. Conduct finance
centers around the mental systems of the capital market to discover the wonder of the market.
The primary reason for conduct finance is to recognize, clarify and anticipate the orderly
anomalies in monetary markets. It has built up an essential way to deal with anomalies, which
began to allow financial backers to surpass normal returns. Accordingly, the greater part of the
analysts depends on the social finance models to clarify the anomalies in the financial exchange.

There are numerous choices for financial investors who need to use their investment funds in the
most beneficial manner. The significant and profoundly favored speculation alternative is
corporate securities. The stock trade is a significant community for financial backers and some
record proprietors as nations' significant corporate organizations are exchanged there, they are
solid, and exchanging exchanges are simple and speedy to make. Various financial backers of
various sizes exchange the securities exchange. Financial backers utilize various techniques to
pick the stocks that will yield the most profit from their buys. The majority of these strategies
contend that financial backers are judicious and carry on reasonably in their venture choices.
Notwithstanding, as referenced in the writing survey area, considers uncovered that the value
arrangements of stocks are esteemed in opposition to the Efficient Market Hypothesis as such,
financial backers are following up on the supposition that they act objectively and the pricing of
offers is assessed thusly. Since all securities exchange financial backers are individuals it is
typical that they have sentiments and distinctive brain science and consequently they may act in
an unexpected way. To examine the impacts of these qualities, which influence speculation
choices, and social account and the impacts of these non-rational practices of the financial
backers on the stock costs, a few anomalies have happened and some significant focuses that
need consideration are referenced to cause financial backers to have more significant yields. This
exploration is an examination on the meaning of conduct money, its set of experiences,
advancement, abnormality idea and its sorts.
In this report it is clear that as the hypothesis predicted if the information is available there will
be an efficiency which is not true always. There are many anomalies which cause the human
mind to make decisions irrationally. Many companies always publish their data regularly. Still
our stock market (DSE) is not near to the efficient level. Now the question can arise, why this
type of irrational behaviors occurs? And the answer is continuing interruption of the
externalities. This statement is very much complicated than it may seem. But it is for sure that
anomalies exist in DSE and anomalies are not some kind of illusion or myth. By analyzing the
data, it is proven that in summer the market performs differently than the whole year.
References
1. Akkoç, S. (2003). Overreaction hypothesis and an empirical study on the Istanbul
exchange (Master's thesis). University of Osman Gazi, Eskisehir, Turkey.
2. Arsad, Z., & Coutts, J. A. (1997). Security price anomalies in the London international
stock exchange: A 60-year perspective. Applied Financial Economics.
3. Aggrawal, A., & Tandon, K. (1994). Anomalies or illusions? Evidence from stock
markets in eighteen countries. Journal of International Money and Finance.
4. Thaler, R. H. (ed.). (2005). Advances in behavioral finance (Vol. 2). Princeton, NJ:
Princeton University Press.
5. Tufan, C., & Sarıçiçek, R. (2013). Behavioral finance models, effective market
hypothesis and anomalies. Trakya University Journal of Social Sciences.
6. Pantzalis, C., & Ucar, E. (2014). Religious holidays, investor distraction, and earnings
announcement effects. Journal of Banking & Finance.
7. Lucey, B. M., & Dowling, M. (2005). The role of feelings in investor decision-making.
Journal of Economic Surveys.
8. Md. Hashibul Hassan & Md. Shahidullah Kayser | (2019) Ramadan effect on stock
market return and trade volume: Evidence from Dhaka Stock Exchange (DSE), Cogent
Economics & Finance.
9. Capital market seasonality: The case of Dhaka Stock Exchange (DSE) returns
 Appendix A
 AVERAGE

Whole
Summer Year
2010 4,942.25 5,350.52
2011 5033.1173 4,998.71
2012 4001.205 3,833.36
2013 3870.0816 3,996.29
2014 4464.934 4,670.14
2015 4460.2807 4,622.61
2016 4409.2655 4,563.82
2017 5592.6104 5,791.83
2018 5509.7623 5,566.24
2019 5,293.09 5,213.47

Chart Title
7,000.00

6,000.00

5,000.00

4,000.00

3,000.00

2,000.00

1,000.00

-
2008 2010 2012 2014 2016 2018 2020

Summer Whole Year

Appendix B
 Standard Deviation
 Summer Whole Year

2010 4,942.25 5,350.52

3.000000%

2.500000%

2.000000%

1.500000%

1.000000%

0.500000%

0.000000%
2008 2010 2012 2014 2016 2018 2020

Appendix C
 Variance
Whole
Summer Year
2010 0.0001072 0.0001400
2011 0.0003270 0.0008850
2012 0.0003300 0.0004980
2013 0.0002230 0.0001830
2014 0.0000449 0.0000550
2015 0.0001140 0.0000650
2016 0.0000310 0.0000200
2017 0.0000290 0.0000340
2018 0.0000410 0.0000490
2019 0.0000710 0.0000530
 Chart Title
0.0010000

0.0009000

0.0008000

0.0007000

0.0006000

0.0005000

0.0004000

0.0003000

0.0002000

0.0001000

0.0000000
2008 2010 2012 2014 2016 2018 2020

Summer Whole Year

0.0009000

0.0008000

0.0007000

0.0006000

0.0005000

0.0004000

0.0003000

0.0002000

0.0001000

0.0000000
1 2

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019