Market efficiency, anomalies and behavioral finance: A review of theories and empirical evidence

The efficient-market hypothesis (EMH) has been a cornerstone of financial theory for over a century, but persistent anomalies in stock markets challenge its validity. This review explores market efficiency, defining the concept and outlining its evolution through weak, semi-strong, and strong-form tests. It also examines key market anomalies—including the Winner–Loser Effect, Momentum Effect, calendar anomalies, and the Equity Premium Puzzle—that question the rationality of market participants. Theories from Behavioral Finance, such as investor heuristics, overconfidence, and herd behavior, are evaluated in explaining these inefficiencies. This analysis is valuable for academics developing financial models, investors optimizing portfolios, and policymakers regulating stock market stability. By bridging EMH with anomalies and Behavioral Finance, the study offers a nuanced understanding of market dynamics and the interplay between rational and irrational investor behavior.

The publisher's final version of this work can be found at https://doi.org/10.30574/wjarr.2022.15.2.0876.

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