Anomaly

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DEFINITION of 'Anomaly'

A term describing the incidence when the actual result under a given set of assumptions is different from the expected result. An anomaly provides evidence that a given assumption or model does not hold in practice. The model can either be a relatively new or older model.

BREAKING DOWN 'Anomaly'

Anomalies often occur with respect to asset pricing models, in particular the capital asset pricing model (CAPM). Although the CAPM was derived by using innovative assumptions and theories, it often does a poor job in predicting stock returns. The numerous market anomalies that were observed after the formation of the CAPM helped form the basis for those wishing to disprove the model.

Although the model may not hold up in empirical and practical tests, that is not to say that the model does not hold some utility.

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