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There are a number of well-documented anomalies that cause problems for the efficient markets hypothesis (EMH). These problems arise because the EMH assumes any mispricing in the market will be arbitraged away by rational traders who buy relatively undervalued assets and sell relatively overvalued ones.

Among the biggest problems are the existence of momentum and the relatively poor performance of small growth stocks—as well as any security with a lotterylike (or jackpot) distribution. These anomalies continue to occur even after they become known through the publication of academic research. The question is, Why, then, do such anomalies continue to persist?

One explanation offered by researchers attempting to answer this question is that there are limits to arbitrage, which prevents rational investors from exploiting the anomaly. For example:

Read the rest of the article on ETF.com.

 

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