Factors Influencing the Share Price Fluctuations of Woolworths Holdings Limited over the Period 01-Feb-2009 to 28-Feb-2011

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.

It is believed that Efficient Market Theory is based upon some fallacies and it does not provide strong grounds of whatever that it proposes. More importantly the Efficient Market theory is perceived to be too subjective in its definition and details and because of this it is close to impossible to accommodate this theory into a meaningful and explicit financial model that can actually assist investors in making the investment decisions (Andresso-O’Callaghan, B., 2007).

As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the

The Efficient-Market Hypothesis (EMH) states that it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

The premise of an efficient market is that stock prices adjust accordingly as information is received. The speed and accuracy of the pricing changes are a reflection of the strength of the market efficiency, where in theory a perfectly efficient market will re-adjust prices immediately and precisely with new information. The efficient market hypothesis aligns with beliefs about whether technical and fundamental analyses are useful in making investment decisions or whether a passive approach is appropriate. In a perfectly efficient market, these types of analyses are not able to predict stock price trends (based on market inefficiencies or price abnormalities) which could assist in portfolio positioning or investment management. However, some investors belive that the market pricing is not precise and that there are timing windows and pricing trends that can be identified through analysis of past performance and finding price abnormalities where all information is not correctly reflected in the stock price (Hirt, Block and Basu, 2006).

Efficient Market Hypothesis has been controversial issues among researcher for decades. Until now, there is no united conclusion whether capital markets are efficiency or not. In 1960s, Fama (1970) believed that market is very efficient despite there are some trivial contradicted tests. Until recently, both empirical and theatrical efficient market hypothesis was being disputed by behavior finance economist. They have found that investor have psychological biases and found evidences that some stocks outperform other stocks. Moreover, there are evidences prove that market are not efficient for instance financial crisis, stock market bubble, and some investor can earn abnormal return which happening regularly in stock markets all over the world. Therefore, the purpose of this essay is to demonstrate that Efficient Market Hypothesis in stock (capital) markets does not exist in the real world by proofing four outstanding unrealistic conditions that make market efficient: information is widely available and cost-free, investor are rational, independent and unbiased, There is no liquidity problem in stock market, and finally stock prices has no pattern.

The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to

The efficient market hypothesis (EMH) has consistently remained in the forefront of finance theory for decades. As technology has advanced, the ability to assess the efficient market hypothesis has increased exponentially and so have the opportunities to exploit it. Tactics such as high frequency trading and insider trading threaten the dependability of the efficient market hypothesis. EMH is a rudimentary theory that implies the value of an asset is directly correlated or about equal to the intrinsic value of the asset. (Brigham & Houston, 2012) The intrinsic value of a stock is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors (investopedia.com, 2014). Investors use this logic to determine whether to buy or sell a stock depending on its perceived value with respect to the intrinsic value. Whether the investor employs an active or passive investment strategy, the EMH is a rational decision making process to ensure a confident investment.

Many stock market anomalies could not be explained by Efficient Market Hypothersis (EMH). The psychological biases, such as disposition effect, might help in explaining some of the behavioural anomalies. Many researchers found that the presence of abundance of disposition-prone investors could affect the market prices. However the underlying causes of disposition effect is still unclear.

“An ‘efficient’ market is defined as a market where there are large numbers of rational, profit ‘maximizes’ actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.”

“An 'efficient' market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to

Being that news and exogenous shocks are by nature erratic, prices will share their randomness. Accordingly, as stipulated by the rational expectations model, investors will act in response to financial shocks mindful of the latters’ macroeconomic consequences. Furthermore, both efficiency and rationality have relative connotations within the economy and are contingent to different levels of market friction. Campbell, Lo, and MacKinley echo this view and argue that the concept of relativity is a more useful approach than the absolutist interpretations seen in traditional economic literature. Markets can, thus, still be efficient even if certain economic agents are irrational or if price volatility of assets cannot be grounded by fundamentals. Since certain market participants are irrational, specific stock market trades will not be based on a rational evaluation. Yet, Fama’s sophisticated trader argument finds that the impact of the rational agents within the market is powerful enough to minimize the departure of actual prices from their fundamental value. Fama expanded EMH into three distinct forms- weak, semi-strong and strong form- to allow the hypothesis to be tested in financial analyses. The form that is perceived, however, as the most reflective of EMH and will be employed by the paper is the semi-strong. This form of market efficiency

Stock market efficiency has been the subject matter of research studies for periods well over the past three decades. Several theories have been established about basically how the competition will drive all information into the prices of securities quickly. Centering this idea the concept known as Efficient Market Hypothesis has been evolved which also has been the subject of intense debate among academics and financial professionals. Efficient Market Hypothesis states that at any given time security prices fully reflect all available information. It is stated that if the markets are efficient and current prices fully reflect all information then buying

The efficient market hypothesis (EMH) promoted by Fama (1970) is considered an important theory in financial area. However, the existence of momentum profits has threatened EMH.

If a capital market fully and accurately reflects all relevant information when determining the price of the securities, the market is effective and the three characteristics of the effective capital market are efficient operation, efficient price, and efficient distribution(Sascha Kurth,2013). There are three forms of efficiency market, this article will analyze the characteristics of semi-strong effective market and the impact of the abnormal Book-Market-value effect on the effective market hypothesis so that investors should be dialectical view of the market hypothesis and the emergence of abnormal to make the stable investment activities.