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Anomalous Patterns of Market Movements: Detecting a Different Kind of Market Inefficiency

This paper uses the Overlapping Serial Test (OS-test) to detect anomalous patterns in the distribution of sequences of stock market movements up and down. Our results show that most stock markets exhibit idiosyncratic recurrent patterns, contrary to the efficient market hypothesis. We also use Principal Components Analysis to demonstrate that the kind of inefficiency detected by the OS-test is different from the inefficiencies detected by short memory tests, or by long memory tests commonly used in the literature. This method of analysis could be used by investors to help derive trading strategies.