Utilizing Market Anomalies for Active Equity Investing Strategies

Throughout the history of financial markets, various market anomalies have been documented that challenge the efficient market hypothesis (EMH). These anomalies present opportunities for active equity investors to outperform the market. One such anomaly is the 'January Effect,' which refers to the tendency for stock prices, particularly small-cap stocks, to increase in January more than in other months. Another notable anomaly is 'Post-Earnings Announcement Drift,' where a stock's price continues to drift in the direction of an earnings surprise, for an extended period after the announcement.

As a portfolio manager, you are tasked with analyzing these anomalies and developing an active equity investment strategy that leverages insights from behavioral finance. In your essay, discuss how these market anomalies create potential inefficiencies in stock pricing. Furthermore, provide a framework for your investment strategy incorporating these anomalies and assess the risks and considerations involved.