Anomaly

What is an 'Anomaly'

An anomaly is 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.

RELATED TERMS
  1. International Capital Asset Pricing ...

    A financial model that extends the concept of the capital asset ...
  2. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  3. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  4. Empirical Probability

    A form of probability that is based on some event occurring, ...
  5. Fama And French Three Factor Model

    A factor model that expands on the capital asset pricing model ...
  6. Business Model

    The plan implemented by a company to generate revenue and make ...
Related Articles
  1. Fundamental Analysis

    Capital Asset Pricing Model - CAPM

    CAPM is a model that describes the relationship between risk and expected return.
  2. Investing Basics

    Seven Market Anomalies Investors Should Know

    Though they're unpredictable and heavily contested, market anomalies can often work in an investor's favor.
  3. Investing

    The Capital Asset Pricing (CAPM) Model: Pros and Cons

    CAPM, while criticized for its unrealistic assumptions, provides a more useful outcome than either the DDM or WACC in many situations.
  4. Fundamental Analysis

    Taking Shots At CAPM

    Find out why many investors think the capital asset pricing model is full of holes.
  5. Trading Systems & Software

    Build a Profitable Trading Model In 7 Easy Steps

    Trading models can provide a powerful tool for building profit. Traders can use and customize existing trading models or build an original model. This article provides seven steps to building ...
  6. Economics

    What is a Business Model?

    Business model is the term for a company’s plan as to how it will earn revenue.
  7. Investing Basics

    Introduction To International CAPM

    ICAPM is one of several models used to determine the required return on an asset, discover its limitations and how to use it.
  8. Investing Basics

    Six Market Anomalies Investors Should Know

    Certain tradable anomalies persist in the stock market. Here are six that fascinate investors.
  9. Professionals

    Variability Of Returns

    We look at scientific variability on market returns, as well as market return anomalies.
  10. Options & Futures

    Financial Concepts: Capital Asset Pricing Model (CAPM)

    Pronounced as though it were spelled "cap-m", this model was originally developed in 1952 by Harry Markowitz and fine-tuned over a decade later by others, including William Sharpe. The capital ...
RELATED FAQS
  1. What is the average return on equity for a company in the electronics sector?

    Learn about the Black-Scholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >>
  2. What is the difference between financial forecasting and financial modelling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
  3. Are perfect competition models in economics useful?

    Take a look at some of the arguments made by the proponents and critics of the theory of perfect competition in contemporary ... Read Answer >>
  4. What are some examples of different types of business models in major industries?

    Learn what types of business models are currently being used in the marketplace as well as examples of models that work for ... Read Answer >>
  5. What are the advantages and disadvantages of the Gordon Growth Model?

    Understand the advantages and disadvantages of using the Gordon Growth Model to value a company's publicly traded stock. ... Read Answer >>
  6. What are some examples of ways that sensitivity analysis can be used?

    Understand the concept of sensitivity analysis and learn about the wide variety of disciplines to which it can be applied. Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center