A Study of Empirical Tests of Weak-form Efficiency of Stock Markets
Sarika Mahajan
Key words: Efficiency, Stock Markets and Abnormal profits
JEL Classification: C18, G12, G14
Introduction:
The movement of stock prices is amongst few phenomenon that have cut across the boundaries of academic disciplines. These price movements are governed by rational, emotional, economical, geographical and psychological factors. The efficient market hypothesis (EMH) assumes that at any given time, security prices fully reflect all available information, which implies that price movements do not follow any pattern or trends. It further assumes that an efficient stock market must ensure rapid information access, so that it can instantaneously process the
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The EMH has historically been subdivided into three categories based on Roberts’ (1967) classical taxonomy of information sets:
Weak form efficiency: Prices fully reflect historical information of past prices and re- turns.
Semi-strong form efficiency: Prices fully reflect all information known to all market participants (public information).
Strong form efficiency: Prices fully reflect all information known to any market partici- pant (public and private information).
For weak form tests, information can include past history of stock prices, company characteristics, market characteristics and the time of year. Tests for weak form market efficiency, more generally, referred to as tests of return predictability are discussed below:
1. Predictability of Past
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French (1980) studies daily returns on the Standard and Poor’s Index which is a composite portfolio of the 500 largest firms on the New York Stock Exchange over the period from 1953 to 1977. He found that the mean daily return on Monday during 1953-1977 is negative (-0.168%) and highly significant (t-statistic of - 6.82) while the average daily return on the other four days of the week are all positive. Moreover, the average daily return on Monday is also negative in each of the five- year sub-periods that were studied.
Various explanations have been proposed for the day-of-the-week effect. Lakonishok and Levi (1982) argue that the day-of-the-week effect is caused by the delay between trading and settlements in stocks and clearing checks. Accordingly, they adjusted the daily return on each day of the week during the period from July 1962 to December 1979 and found that the day-of-the-week effect is only partially eliminated. Therefore, the day-of-the-week effect can not be entirely accounted for by payment and clearing delays.
Capital markets provide a function which facilitates the buying and selling of long-term financial securities to increase liquidity and their value, Watson & Head (2013). Hence, the Efficient Market Hypothesis (EMH) explains the relationship that exists with the prices of the capital market securities, where no individual can beat the market by regularly buying securities at a lower price than it should be. This means that in order to be an efficient market prices of securities will have to fairly and fully reflect all available information, Fama (1970). Consequently, Watson & Head (2013) believe that market efficiency refers to the speed and quality of how share price adjusts to new information. Nevertheless, the testing of the efficient markets has led to the recognition of three different forms of efficiency in which explains how information available is used within the market. In this essay, the EMH will be analysed; testing of EMH will show that the model does provide strong evidence to explain share behaviour but also anomalies will be discussed that refutes the EMH. Therefore, a judgment will be made to see which structure explains the efficient market and whether there are some implications with the EMH, as a whole.
In a perfect market, the price of a good or service reveals information about both the buyer and the seller. The buyer would never buy anything that costs more than it is worth to him or her, so the price reveals the value to the buyer. The seller would never sell anything for less than its cost of production, so the price reveals the value and cost of the good or service to the seller.
The three-year SAIC stock price data and its corresponding SSE index are obtained from finance.yahoo.com, as it provides dividend-adjusted closing prices. The two data are ordered in time in Excel (Sort Ascending). It is found that 46 SAIC daily stock prices are missing due to suspension of trading, therefore; 46 corresponding SSE daily index are removed in order to match up dates on the two data series.
| The hypothesis that market prices reflect all publicly available information is called efficiency in the:Answer
In this article, “Is the efficient market hypothesis day-of-the-week dependent,”, Stephen Pop reveals significant evidence that the efficient market hypothesis is day-of-the-week-dependent. Overall, for only 62% of firms, the unit root null hypothesis is rejected on all the five trading days. He also discovers that when investors do not account for unit root properties in devising trading strategies, they obtain spurious
In the years since 2000, a few investors have determined that their small cap portfolio outperformed their shares held in larger companies in terms of ROI (return on investment). The total dollar price earned was lesser; nevertheless the benefit percentage was
S. Basu (1997) tested for the information content of price-earnings multiple. He tested to see whether low P/E stocks outperform stocks with high P/E ratios. If historical P/E ratios provided useful information for obtaining higher stock returns then it would be refutation of semi strong form of efficient market hypothesis. His results indicated that low P/E portfolios provided superior returns relative to the market and high P/E provided inferior returns relative to the market. The results reported in this paper indicate that P/E ratio information was not fully
sider BACKGROUND Efficient market theory examines how accurately stock prices signal resource allocation alloc and fully reflect all available information. Fama (1970) introduced the efficient market hypothesis stating there are three forms of efficiency: weak, semi strong, and strong. A market semi-strong, that incorporates all historical information is said to be weak form efficient, while one that responds to all publicly available informatio is semi-strong efficient. In a semiinformation -strong efficient market, prices instantly change to reflect publicly available information. A strong form market, strong responds to all information, both public and private. The hypothesis claims that achieving above average returns on a risk adjusted basis is impossible (Fama 1970). (Fama, The lowest level of market efficiency, weak form, states that the market only reacts to historical information. This means that no one can earn above normal returns based on published historical information; however, the market does not quickly react to new public or private information. It may be possible then, in a weak form efficient market, to obtain abnormal returns form using either new publicly available or private insider information (Fama 1970). (Fama, A semi-strong form market is more efficient that a weak form, as it reacts to publicly strong available new information quickly and share prices adjust to reflect the market’s reaction. share Obtaining
The existence of calendar or time anomalies is a contradiction to the weak form of the Efficient Market Hypothesis (EMH). The weak form of the EMH states that the market is efficient in past price and volume information and stock movements cannot be predicted using this historic information. This form infers that stock returns are time invariant, that is, there is no identifiable short-term time based pattern. The existence of seasonality
In the efficient market everyone make a decision based on the information they have got. In the real circumstances, there is an agency problem so the agents know more information than the shareholder, so they make high investment and make abnormal profit. This is known as a corporate fraud. If the investors find out about this the fraudulent activity then this cause to stop the investments in particular sector. This lead to decrease share price in particular sector. If the price gone up this means that market is in-efficient.
Finance 316 practice problems for final exam 1. True or False: According to the CAPM, a stock 's expected return is positively related to its beta. >> True 2. In practice, the market portfolio is often represented by: A. a portfolio of U.S. Treasury securities. B. a diversified stock market index. C. an investor 's mutual fund portfolio. D. the historic record of stock market returns. 3. A stock 's beta measures the: A. average return on the stock. B. variability in the stock 's returns compared to that of the market portfolio. C. difference between the return on the stock and return on the market portfolio. D. market risk premium on the stock. 4. If the slope of the line measuring a stock 's historic returns against the market 's historic
Over time as people began to analyze the efficient market hypothesis it appears that several anomalies in the capital market were discovered. One of the anomalies discovered was the January Effect. According to Kolahi (2006), Rozeff and Kinney were the first to observe the January Effect anomaly. In the January Effect it was discovered that the return on common stocks were especially high during January compared to other months. The way that the January Effect works is that investors would sell their small cap stocks at the end of the year to write off their losses during the end of December and the first week of January. This effect went against the EMH because the EMH states that the stock prices cannot be predicted but the January Effect proved otherwise.
In addition to the analysis of the macroeconomic events that has affected the stock indexes for both the U.S. and Europe, I constructed a two stock portfolio made of Target Corporation (TGT) and Ralph Lauren Corporation (RL). Both of these stocks had equal weights in my portfolio. Everything that has been discussed in the macroeconomic section of this paper affects the returns of my two stock portfolio as well. In addition, there were different managerial decisions made that affect the stock’s weekly return. For example, both stocks paid out a dividends during the time. Individually, Target released sales and profit decline for the holiday seasons gave a gloomy outlook to 2017 profit, which had a huge effect on the stocks return for that
Established Market Price – substantiated from sources independent of the seller: and are current sales prices established in the normal course of
Efficient capital market “It was generally believed that securities markets were extremely efficient in reflecting information about the stock market as a whole” (Fama 1970). To extent that when there is new information about stock rise, the news was dispersed immediately and it affects the security 's price at that time.