Abstract:
Financial markets are full of dynamics. There is the baseline business cycle where returns of financial assets are most likely positive during economic upswings. Downturns and depression on the other hand are rather accompanied by negative returns. Since asset prices are valued by the investors who are forward looking, both current and future expectations are, or at least should be, incorporated in the current price. This makes financial markets, and more particularly stock markets, very representative as economic outlook indicators. Next to the baseline trend, small deviations can be observed from the trend which might be caused by rational and seemingly irrational behavior by investors. A clear example is the announcement of better than expected results from a certain firm, which will possibly strengthen the price of the company‘s stocks. High stock returns due to weekend or holiday effect seems to be irrational to several investors, though some find perfectly rational explanation for them. The last statement reveals the baseline of the analysis presented here. Empirical analysis might show the presence of certain patterns in returns which are rather hard to explain and do not comply with current theories. These empirical results, know as anomalies, can be an indication of errors in current asset-pricing models, or might reflect profit opportunities for investors which indicate market inefficiency.
