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Market Efficiency Tests: Five Anomalies Exist In Both Us And Australian Markets

Executive summary
Market efficiency tests include weak, semi-strong and strong three forms. They assume that financial markets are "informationally efficient", or that prices of trading assets, already reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about future prospects. The weak form test is based on the past information and public available information for semi-strong while strong form covers not only the public but also the private information.

Five market anomalies that appeared in U.S. and Australian equity market are discussed. They are Book-to-market ratio, January effect, small firm effect, weekend and temperature effect. The small firm effect seems to be disappeared in the US market in recent years and existed in Australia until 1994. January effect is vanishing in both US and Australian market. There is a statistically significant negative correlation between stock returns and temperature is found in both U.S and Australian equity market and theory of stock returns and temperature turned out to be true. In contrast to US market, Australian stock markets appeared to exhibit a Tuesday effect rather than Monday effect (Weekend effect). For the book-to-market ratio, there is significant evidence that the higher book-to-market ratios are related to higher returns in U.S whereas the book-to-market ratios are not significantly related to return in Australian.

The active fund managers always earn short term excess returns, but they can not outperform a passive buy-and–hold (BHM) investment strategy for US equity mutual funds with wavy returns in the future. In Australian market, the active fund managers are now less capable of outperforming BHM investment because the performance has been less significant for the last decade and there are several biases that limits in assessing whether the active managers can outperform the market.

As a result of the report, the markets...