Lesson 6 of 7 · 14 min
Market anomalies II: other anomalies and what they mean
Closed-end fund discounts, earnings-surprise drift, IPO underpricing and return predictability all look like inefficiencies, but costs, risk, methodology and instability make them very hard to turn into profits, so most researchers see them as statistical artefacts rather than violations of efficiency.
In short
- Closed-end funds usually trade at a discount to NAV (on average roughly 4–10%). Fees, manager expectations, embedded tax liabilities, illiquidity and NAV errors explain little or only part of it, and costs plus the tendency of discounts to shrink stop it being exploited.
- Earnings surprises are priced quickly but not always completely: some adjustment continues after the announcement, which questions the semi-strong form, yet the profits may vanish after proper control for risk and costs.
- IPOs are on average underpriced (big first-day gains), but buyers after the first day earn no abnormal profits, and long-run IPO returns are below average: a sign of initial overreaction, or of methodology.
- Returns are linked to prior information (interest rates, inflation, volatility, dividend yields), but that reflects fundamentals, not inefficiency, and the links are unstable.
- Most anomalies disappear when the methods are corrected; overreactions and underreactions both occur, so on average markets are efficient.
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