Form Of Efficient Market Hypothesis Research Articles

Testing the Weak Form of Efficient Market Hypothesis: Empirical Evidence from Asia-Pacific Markets

This empirical study is conducted to test the weak-form market efficiency of the stock market returns of Pakistan, India, Sri Lanka, China, Korea, Hong Kong, Indonesia, Malaysia, Philippine, Singapore, Thailand, Taiwan, Japan and Australia. Monthly observations are taken for the period January 2004 to December 2009. Autocorrelation, Ljung-Box Q-statistic Test, Runs Test, Unit Root Test and the Variance Ratio are used to test the hypothesis that the stock market follows a random walk. Monthly returns are not normally distributed, because they are negatively skewed and leptokurtic. In aggregate we concluded that the monthly prices do not follows random walks in all the countries of the Asian-Pacific region. The investors can take the stream of benefits through arbitrage process from profitable opportunities across these markets.

Semi-Strong Form of Market Efficiency for Dividend and Bonus Announcements:An Empirical Study of India Stock Markets

Efficient Market Hypothesis (EMH) is predominantly a research area in the field of finance. EMH is studied worldwide to understand the share price behaviour and the same can be predicted by any means in future. Prediction of this share price behaviour helps a rational investor to earn abnormal returns from the markets. Symmetry of public information is associated with the semi-strong form of efficient market hypothesis which implies that the publicly available information is known to all the investors in the market and share prices fully reflect this information.The favourable news tends to bring a positive impact on the stock price behaviour and vice versa. Hence, the study of such corporate events can lead to predictability in the stock market which can help investors to earn abnormal returns. The present research paper has employed the event study and cross-sectional data analysis for validating the existence of semi-strong form of market efficiency in Indian stock markets pertaining to two major corporate events; 'dividend and bonus announcement'. The results of the study reveal that dividend and bonus announcements have significant impact on share prices only on 1 day pre announcement.

Testing of Weak Form of Efficient Market Hypothesis: Evidence from the Bahrain Bourse

Efficient market hypothesis (EMH) states that financial markets are “informationally efficient”, implying that current prices fully reflect all available information. The present study aims at testing the weak form of market efficiency of the individual stocks listed on the Bahrain Bourse for the period 2011 to 2015. Weak form of EMH is tested using the Kolmogorov-Smirnov goodness of fit test, run test and autocorrelation test. The K-S test result concludes that in general the stock price movement does not follow random walk. The results of the runs test reveals that share prices of seven companies do not follow random walk. Autocorrelation tests reveal that share prices exhibit low to moderate correlation varying from negative to positive values. As the study shows mixed results, it is difficult to conclude the weak form of efficiency of Bahrain Bourse.

Weak Form of Efficient Market Hypothesis – Evidence from Pakistan

This research is an empirical investigation of the weak form of efficiency of the Karachi Stock Exchange (KSE-100) Index, which is the prominent index of Pakistan Stock Exchange (formerly Karachi Stock Exchange). The contribution of this paper is to analyze a longer 24 years’ sample period (1991-2015) with three frequencies of data – daily, weekly and monthly index returns. The results show that return series of three frequencies have a negatively skewed, leptokurtic and non-normal distribution. The non-parametric Phillips-Perron (PP) test and parametric Augmented Dickey-Fuller (ADF) test rejected the non-stationarity hypothesis for index returns at the level for all daily, weekly and monthly data. The auto-correlation of randomness for the chosen period rejected the Random Walk Hypothesis (RWH) for daily and weekly index returns but documented the existence of RWH for monthly index returns. Lastly, the findings of run tests show market inefficiency on daily and weekly data and efficiency for monthly returns. The findings are not consistent with efficiency theory as the stock returns do not follow the random walk hypothesis and hence nullify weak form of efficiency for daily and weekly returns. However, the research documents weak-form of efficiency for monthly returns; the existence of randomness in monthly data is not surprising for an emerging market like Pakistan which does not have a long memory to remember previous monthly prices. Positioned upon weak form of efficiency assumption, the investors on the KSE can make abnormal returns on the basis of historical share prices (Malhotra, Tandon, & Tandon, 2015). The concept of market efficiency is important for analysts, for investor’s investment decisions, and regulators of stock exchange to improve the flow of information. Further research can be done with more sophisticated techniques of testing weak form of efficiency

Testing the weak form of efficient market hypothesis in carbon efficient stock indices along with their benchmark indices in select countries

This paper presents the results of tests on the weak form of Efficient Market Hypothesis applied to carbon efficient stock market indices of India, the United States of America (USA), Japan, and Brazil and their corresponding market indices which are used as their benchmark indices. In this study, Kolmogrov-Smirnov and Shapiro-Wilk tests are used to test the normality of data. Run test and auto-correlation test are used to check the randomness of the data. The tests are performed using daily closing prices for the whole sample period. It is found from the statistical tests that the daily closing prices do not follow random walks in all the four countries. However, monthly returns are following random walk in case of India, USA, and Brazil, but not in case of Japan.

Weak-Form Efficiency of the Indian Stock Market: An Empirical Analysis

The present study attempts to verify weak form of efficient market hypothesis using daily data for the indices of Indian stock market, namely, NIFTY 50 (NSE-50), CNX 500 (NSE-500), CNX IT INDEX (NSE-IT), BANK NIFTY INDEX (NSE-BANK) and NIFTY MIDCAP 100 (NSE-MC100). For the analysis, the study employed GARCH (1, 1) model and EGARCH (1, 1) model over the sample period of 1, January 2010 to 5, November 2015. The study results exhibited that returns series are characterized by high persistence of volatility clusters and leverage effects over the sample period. The empirical findings show that the indices of National Stock Exchanges are not weak form efficient.

فحص إستراتيجية الانعكاس الاستثمارية طويلة الأجل في بورصة عمان باستخدام الطريقة الحسابية في حساب العوائد غير العادية التراكمية = Examination of the Long-Term Contrarian Investment Strategy in Amman Stock Exchange by Using the Arithmetic Method in Calculating the Cumulative Abnormal Returns

This study aims at investigating the Long-term Overreaction Hypothesis (LORH) and the possibility of achieving abnormal returns, which contradict the efficient market hypothesis (EMH) as a result of applying the long-term contrarian investment strategy (LCIS) in Amman Stock Exchange (ASE) using arithmetic method in calculating the cumulative abnormal returns. A study sample consisting of 45 firms is selected from firms listed on ASE during the period 1987-2014. These firms were not delisted, merged or liquidated during the study period and their annual market capitalization was available. The study results confirmed that there is no statistically-significant evidence of contrarian in ASE using arithmetic method in calculating the cumulative abnormal returns, or whether the parametric or nonparametric methods are used. Therefore, ASE is efficient at the weak form of efficient market hypothesis (WFEMH) for the period 1987 -2005. During the period 2006-2014 the market was in- efficient at weak form due to statistically significant contrarian; therefore, abnormal returns can be achieved in accordance with the methodology used in this study. The study concluded that abnormal returns cannot be achieved during the period 1987-2005, and during the period 2006-2014 the market was inefficient at the weak form and there was a possibility of achieving abnormal returns. Further research might be conducted using other methodologies to confirm these results with regard to market efficiency. The study recommends that investors in (ASE) should not be encouraged to apply the long-term contrarian investment strategy because they cannot achieve significant abnormal returns in the long-run. Finally, it recommends further studies be conducted about the contrarian investment strategy in ASE and other emerging stock exchanges.

Test of Random Walk Theory in the National Stock Exchange

Capital market being a vital institution which facilitates economic development. It is true that so many parties are interested in knowing the efficiency of the capital market. The small and medium investors can be motivated to save and invest in the capital market only if their securities in the market are appropriately priced. The information content of events and its disseminations determine the efficiency of the capital market. That is, how quickly and correctly security prices reflect these information show the efficiency of the capital market.The term market efficiency is used to explain the relationship between information and share prices in the capital market. The three forms of market efficiency are weak form, semi – strong form and strong form. A market is considered as weak form if current prices fully reflect all information contained in historical prices. Thus, no investor can devise a trading rule based on past price patterns to earn abnormal return. A market is semi-strong efficient, if stock prices instantly reflect any new publicly available information. A market is said to be strong form efficient, if prices reflect all types of information whether available publicly or privately.It is usually believe that the markets in developing and less developed countries are not efficient in semi-strong form or strong form. In the developed countries, many research studies have been conducted to test the efficiency of the capital market. In India, very few studies have been conducted to test the efficiency of the capital market.The weak form of efficient market hypothesis also known as Random Walk Hypothesis states that at a given point of time, the size and direction of the next price change is at random.Hence, this paper has made an attempt to analyse whether prices in National Stock Exchange follow a random walk process as required by market efficiency.

Testing Weak Form of Efficient Market Hypothesis: Evidence from Bombay Stock Exchange (BSE) & National Stock Exchange (NSE)

The study examines the validity of Weak form of Efficient Market Hypothesis in Indian stock market with special reference to Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). For testing the presence of random walk, log returns of daily, weekly and monthly closing prices from July 1997 to Dec 2013 are employed. The market efficiency is tested by using both parametric and non-parametric test including run test, Ljung-Box Q-statistic test, unit root test, variance ratio test and GARCH (1, 1). In order to verify the normality of return series, Jarque Bera test was used and descriptive statistics were examined. The results of the same revealed non-normality of return series and further exhibits negatively skewed and leptokurtic returns. The run test results reveal that successive market returns are not independent for daily and weekly returns but presence of random walk is found in monthly returns for both BSE &NSE. Daily returns are serially correlated but for weekly and monthly returns insignificant serial correlation is found. The unit root test is used for testing the stationarity of the return series and the results show that daily, weekly and monthly returns are non-stationary when tested at level but become stationary at first difference. The variance ratio test reveals traces of weak form of market inefficiency under assumption of homoscedasticity and heteroscedasticity. The GARCH (1, 1) test reveals high persistence and slow reversion to the mean. The implications of rejection of random walk hypothesis supports the predictability of future stock prices by studying the pattern of historical prices and providing an opportunity to investors to earn supernormal profits by holding a well-diversified portfolio.

Market Reaction to Bonus Announcement in Post Global Financial Crisis Era: Evidence from India

This study examines the stock price reaction contiguous with bonus announcement surrounding its announcement and effective day in post global financial crisis period. Sample of 74 bonus announcements from the constituents of Indian CNX 500 companies that announced bonus have been used for the period between 2008 through 2012. The standard event study methodology has been used. According to semi-strong form of efficient market hypothesis any information content associated with bonus announcement must be reflected in form of abnormal return on announcement day itself. However, several studies, report positive abnormal returns associated with bonus surrounding announcement as well as effective days. This study reports statistically significant positive abnormal return surrounding announcement as well as effective day and it is consistent with earlier studies.

Price Earning Ratio Effect : A Test of the Semi Strong Form of Efficient Market Hypothesis in Indian Stock Market

Proponents of Semi strong form of Efficient Market Hypothesis (EMH) claim that security prices fully reflect all publicly available information in a rapid and unbiased manner. Opponents of this Hypothesis question its validity by explaining various anomalies in stock markets. One such anomaly that they elucidate is Price Earning (P/E) ratio Effect, which is based on the premise that P/E ratios are indicators of the investment performance of a security and low P/E stocks have a tendency to outperform high P/E stocks even after adjusting for underlying risks.The purpose of the study is to empirically test the relationship between P/E ratios and equity returns in Indian stock market based on monthly stock returns of 90 companies during the period April 2006 – June 2012 and thereby to examine the validity of semi strong form of EMH. The study applies Jensen, Sharpe and Treynor measures, which are based on Sharpe-Linter Capital Asset Pricing Model (CAPM) to test the risk- return relationships of these portfolios and to compare whether portfolio of low P/E stocks outperforms the portfolio of High P/E stocks. The study attempts to test, if there is any statistically significant difference between the returns of such a portfolio and a simple buy and old strategy. The study also attempts to examine if there is any statistically significant difference between the returns of Lowest P/E portfolio and Highest P/E portfolio using an alternative specification of CAPM. The findings of the study explain the superior performance of low P/E portfolio to high P/E portfolio, indicating the premium associated with cheap stock.

An Empirical Study of the Interrelationships, Integration, and the Efficiency of Stock and Foreign Exchange Markets in Fiji

This article attempts to examine the integration and efficiency of the pacific country Fiji’s stock and foreign exchange markets. The study employed, Unit Root test, Cointegration and Error correction models, and the VEC Grangers causality test, using the daily data of FJ$/USD $, and Fiji’s market capitalization index (stock market), from 3 rd August 2010 to 10 th July 2012. The level form data follows the unit root time series process , and the difference form, and return form data follow stationary process .This broadly supports the ‘weak form efficient market’ hypothesis. However, the market capitalization index, and FJ$/US$ rates are cointegrated. The cointegrating coefficient of the FJ dollar is positively related to the market capitalization index, and therefore, the FJ dollar appreciation stimulates the Fiji market capitalization index. This is perhaps the first scientific research which shows that for the small open Pacific economy of Fiji, a strong currency supports the stock market by encouraging a low inflation environment and therefore there may be some merit in the argument for aligning to strong neighboring currency of Australian dollar. The changes in the market capitalization index is related to the long run trend factors in FJ dollar index as revealed in the error correction model. The return data of FJ dollar, do not Granger cause the return data of the Fiji stock market return in the short run with out an error correcting factor equation and vice versa as well. This supports the semi strong form of efficient market hypothesis, though more studies on markets integration are recommended by us, and we recommend more policy intervention to create more liquidity and depth in Fiji stock markets.

Seasonality, Quarterly Impact on Net Asset Value of Equity Linked Savings Schemes

This article attempts to (a) understand the quarterly seasonal behaviour of Net Asset Value of Equity Linked Savings Schemes (ELSS—Tax Saver Schemes), (b) analyse statistical significance of quarterly seasonal behaviour, (c) investigate the existence of unit root (Stationarity and Non-Stationarity time series of deseasonalised NAV) and (d) examine the weak form of efficient market hypothesis. Twenty tax saver schemes launched on or prior to 2006 were selected for analysis. The quarterly NAV data for the study period between 2006 and 2011 were obtained from respective asset management companies. The study reveals that (i) majority of the selected funds follow normal distribution, that is, seasonalised NAV is not skewed, (ii) 3rd quarter and 4th quarter of a calendar year are seen as appropriate for structuring investment decisions, (iii) statistical significance exists among the seasonal indices across quarters, (iv) autocorrelation function among the selected schemes are statistically significant, that is, deseasonalised NAV is non-stationary, (v) majority of schemes contains unit root at base level, that is, deseasonalised NAV is non-stationary, (vi) all schemes do not contain unit root at first differences, that is, deseasonalised NAV is stationary, (vii) deseasonalised NAV is weak–form inefficient, that is, cautious investors can have greater mileage by exploiting historical NAV and at the same time historical NAV facilitates to forecast future NAV on account of its non-randomness. Hence, this study accentuates that mutual fund investments are beneficial in the long run.

Major events and stock indices–evidence regarding market efficiency

Much of the efficient market literature is actually concerned with the speed with which information is impounded into security prices. In case a firm announces that earnings will be three times larger than expected next year with no additional investment on the part of the firm, the share price should go up to reflect this increase in value. The efficient market hypothesis does not deny the usefulness of this kind of information. An attempt has been made in this paper to test the semi-strong form of efficient market hypothesis by studying the effect of major economic and other Indian events on Mumbai Stock Exchange SENSEX having immediate increase/decrease in its value on the very day the event occurs and information is received by the market.

Using Behavioral Economics to Analyze Credit Policies in the Banking Industry

1. Introduction Are private banks efficient when providing credit to the real economy? Probably, in the last decades there has not been such a bitter debate in academic research as the one related to efficiency in financial markets. Hence, we will not find a unanimous answer to that question, but in the midst of the worst financial crisis since the Great Depression, it seems unavoidable to wonder how did all go wrong? Kindleberger (1978) provided what Shleifer (2000) named the 'anatomy of a price bubble': a process that starts with some good news that generate a profit in an asset, followed by a 'smart-money response' where both the supply and the demand of such asset are encouraged by initial investors. The bubble is then sustained by the same investors, who stimulate positive feedback trading by (...) facilitating noise trader speculation (Shleifer, 2000, p.172). That is, the same agents who are benefited in the early stages of the bubble generate a greater supply of the asset and encourage other actors to participate, increasing the demand and sustaining asset prices until the market, eventually, collapses. Hens and Bachmann (2008) explain the anatomy of the financial bubble that led to our present crisis. They interpret the initial good news that rose prices on the real estate market as the speculative money coming into the house market after the dot-com bubble burst. Then, smart-money investors started the packaging of mortgage risks in new securities (MBS) that are sold outsourced in special investment vehicles (SIV) and sold worldwide (p.94). This approach is focused on the role that subprime mortgages had in the process that led to the crisis, but in this paper we want to delve a little deeper into the study of how the 'smart-money response' promoted the credit growth in order to sustain the bubble. The financial meltdown highlighted significant shortcomings on procedures used by the banking sector when providing credit to the real economy for two reasons. First, a long period of indulgence granting personal loans and mortgages boosted the credit bubble all over the world, and second, after the collapse of Lehman Brothers, an era of suspicion within the banking sector precipitated the liquidity crunch and the credit squeeze to private agents. A traditional approach to analyze market efficiency is the efficient market hypothesis (EMH) by Fama (1970) applied to capital markets. In this paper we will first provide a brief outlook on several ideas that behavioral economics has presented when analyzing the EMH in the context of capital markets, and then, in the bulk of this paper, we shall apply that analysis to the study of retail banking sector -both from a macro and a micro perspective- when granting credit to businesses and households. 2. Behavioral Finance and the EMH on Capital Markets The efficient market hypothesis (EMH) postulates market prices reflect the 'true value' of capital stock, given information available. Fama (1970) sees three categories in the EMH. Under the weak-form EMH, current stock prices fully reflect all currently available market information. Hence, past price and volume information would have no relationship with the future direction of security prices. The semistrong-form EMH assumes current stock prices adjust rapidly to the release of any market and non-market information available to the agents. Finally, the strong-form EMH version implies that prices fully reflect all public and private information. The strong-form assumes perfect markets where information is cost-free and available to all market participants at the same time. (3) Empirical data has challenged the EMH. Relevant examples are Shiller (1981), De Bondt and Thaler (1985), Jegadeesh and Titman (1993), Siegel (1998) or even Fama (1991) and Fama and French (1992), which evidence market anomalies inconsistent with market rationality. Empirical evidence against the weak form EMH include stock market volatility much higher than justified by the expected net present value of future dividends, extreme losers (the worst performing stocks over a long period in the past) outperforming extreme winners in the short future -a sign of overreaction and return to the mean- or, on the contrary, for short term periods price movements over six to twelve months tend to predict future movements in the same direction (which is called 'momentum'). …

Testing the Weak Form of Efficient Market Hypothesis in Nigerian Capital Market

This study aims at testing the weak form of efficient market hypothesis in the Nigerian capital market. The scope of the study consist of all securities traded on the floor of the Nigerian Stock Exchange and the month end value of the All Share Index from 2001 – 2010 constitute the data analyzed. The serial correlation technique of data analysis was used to test for independence of successive price movement and the distributive pattern while runs test was used to test for randomness of share price movement. The result of the serial correlation shows that the correlation coefficients did not violate the two-standard error test. Furthermore, the Box-Ljung statistic shows that none of the serial correlation coefficients was significant and the Box pierce Q statistics shows that the overall significance of the serial correlation test was poor while the result of the distribution pattern shows that stock price movements are approximately normal. on the basis of this findings ,we conclude that successive price changes of stocks traded on the floor of the Nigerian Capital Market are independent and random therefore, the Nigerian Capital Market is efficient in the weak-form.

Empirical Evidence on Weak Form of Efficiency in Indian Stock Market

The article is an empirical study to examine the validity of weak form of efficient market hypothesis in two most popular indices of Indian stock market. For examining the hypothesis whether Indian stock markets are efficient in the weak form, two kinds of tests are conducted. These are parametric and non-parametric tests for randomness, that is, unit root test, autocorrelation test, runs test and variance ratio test. The results suggest that the Indian stock market does not show the characteristics of random walk and as such, is not efficient in the weak form in daily and weekly returns. However, the monthly returns are found to be inefficient only as per variance ratio test. Thus, the investors can avail excess returns by predicting the future returns as all return series present an opportunity to investors to gain from the pattern.

Causal Relationship between Macro-Economic Indicators and Stock Market in India

This paper investigated the market efficiency and causal relationship between selected Macroeconomic variables and the Indian stock market during the period January 2005 to February 2011 by using Ljung-Box Q test, Breusch-Godfrey LM test, Unit Root test, Granger Causality test.The study confirms the presence of autocorrelation in the Indian stock market and macro economic variables which implies that the market fell into form of Efficient Market Hypothesis. Further the Granger-causality test shows evidence of bidirectional relationship between interest rate and stock market, exchange rate and stock market, international stock market and BSE volume, exchange rate and BSE volume. So it suggests that any change of exchange rate, interest rate and international market significantly influencing the stock market in the economy and vice versa. The study also reported unidirectional causality running from international stock market to domestic stock market, interest rate, exchange rate and inflation rate indicating sizeable influence in the stock market movement in the considered period. The study points out that the Indian stock market is sensitive towards changing behavior of international market, exchange rate and interest rate in the economy and they can be used to predict stock market price fluctuations.

Informational Efficiency of Merger and Acquisitions: A Study of Indian Stock Market

The present study is conducted is to measure the change in share prices after the merger announcement date by using event study methodology and is based on a database consisting 515 sample companies taken from CMIE-Prowess for the period of five years i.e. 2005 to 2013. The standard event methodology using Sharpe Single Index and Capital Asset pricing Model (CAPM) is used to calculate abnormal returns. The t-test has been used to study the statistical significance of average abnormal returns (AARs). Capital market is said to be semi strong efficient if AARs are zero. The results shown in different tables depicts that AARs are significant for few days for all the five years but it is the year 2009-10 which is having significant abnormal return on event day. But positive AARs are less significant rather than negative AARs. For the year 2007-08 and 2008-09, it is clear that negative AARs are significant and also less in numbers with a comparison to other three years. Therefore, the presence of significant AARs make mandatory for the study that null hypothesis can’t be accepted for any one of the year. This indicates that delayed in share prices adjustment contradicts with the semi strong form of efficient market hypothesis.

Impact of stock splits on stock price performance of selected companies in Indian context

This paper aims to investigate the impact of stock splits on the stock price performance of selected companies in the Indian stock market. A purposive sampling method was employed, and a sample of 20 stock splits announced by BSE-listed companies from the beginning of April 2006 to the end of September 2008 was selected pertaining to different sectors. The study employs the market model-event study methodology with an event window of 81 days (40 days prior to split and 40 days post-split) and split announcement date (An date, t0) as the event date, to examine the market reaction. The findings indicate that the market is found to react positively with significantly positive average abnormal results on t0 and very near to the An date especially evident during t˜−1 to t+1. The empirical results find the semi-strong form of efficient market hypothesis to be true in the Indian context.