Market anomaly and financial anomaly

Price and return vagrancy

Price and return distortions in imperfect markets result of not enough
liquidity and / or competition as well as of behavioral biases.
This structural or oaccasional flaw happens notably in financial markets.

Markets are rarely fully and continually efficient, they can experience
situations of market anomaly or market inefficiency.

When  sous prices skid dynamic  danger off the road

Price and return distortions

In a market in which goods, services, assets are sold and bought, an 
anomalcluster anomaly (or inefficiency, or irregularity) is a price (1)
distortasymm  distortion  .
In asset markets this is usually related to a
return (2) distortion.
OK, seems like a tautology.
But it is a start to dig further :
distorted in comparison to what?
Is there a "normal" price or return?


This is a tricky point, that supposes a faith in some
value criteria
and
valuation methods.

Anyway, contrarily to the "efficient market theory" that
states that markets, and notably
financial asset markets, take
into account wisely and immediately any relevant information,
markets are in fact rarely fully and constantly efficient.

On the other hand, t
o say they are inefficient would be to generalize.
=> The issue is to find where to position the
"efficient / inefficient"
        cursor
by types of markets.

(1) Price distortions are underpricing or overpricing that are detected
       by comparing
those prices to what can as said above be calculated
       thanks to
  value criteria and calcul valuation methods.

But those criteria and methods have their ambiguity, as any expert has
its
pet ones, and they might be unrealistic and thus be distorted
themselves.


(2) In financial markets notably the (positive or negative)
financial
returns include the price variations.


=> Thus a return anomaly / distortion is an important
      price
bubble rise or  crash fall not explained by economic
      fundamentals.

For example
, if the asset is a stock, a large price move without
a lower
or higher corporate profit prospects, or a lower or higher risk.
Some call this return difference without discernible economic
reason an "alpha", in reference to a famous valuation theory
teeming with Greek letters (see for example
beta coefficient)

Causes and effects

Causes
Such a financial anomaly / distortion takes place because of::
  • Either structural or occasional market problems:
Existence of a structurally or occasionally imperfect
market
, as defined by one that:

* lacks liquidity (not enough available buyers and sellers)
* lacks a fully free / fully balanced competition
   (asymmetries... )
* enjoy (?) built-in perverse effects
of some policies,
    regulations or standard practices.
Effects
A price / return anomaly, nor only affects the market players, but also
can in its turn, if it lasts for too long, distort the allocation of
econsector economic resources and economic risks.

Without enter
ing an
ideological debate, some see those anomalies as a
condemnation of markets and the free economy.

This isforgetting that few human institutions, in fact none of them, are
really fully and always efficient.
Administrations, sometimes seen are alternatives to markets, are
usually not too effective at pricing things, far from it. They lack even
more the the self-correcting mechanisms that are a main trait of
markets.

Detection ...or denial

Market anomalies are not always visible, they can be fuzzy (because
of the difficulty seen above to determine a "fair" valuation) or be just
minor deviations.

Anyway they become blatant in the cases of:
But however obvious the price excesses can become, many players
and pundits get so familiar with them that they usually
blind
deny their presence.
=> T
hey find good stories to justify the price level, and go on
      feeding the buying or selling dearth or frenzy.

See details in the main article on that topic:

Behavioral economics and behavioral finance

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M.a.j. / updated : 17 Sept. 2015
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