Final Project : Seasonal Trading Patterns

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).

This financial crisis has eroded the confidence in the EMH. The validity of the EMH and the existence of the efficient market are questioned broadly. If asset prices are always correct and reflect all the relevant information concerning about its return just as the EMH has suggested, why there exists such a great bubble in the financial market during the recent financial crisis? If the market is efficient, why the market fails to predict the collapse of Lehman Brothers, Bear Stern and other large financial institutions? Overall, the EMH fails to answer such questions. Moreover, the EMH also performs poor in explaining other financial crisis. One example is the Tulipmania that occurred in the 17th century. The prices of the tulip bulbs reached extremely high level which seriously deviates from its fundamental value that was suggested by the EMH. This apparent bubble is contradicted with the prediction of the EMH. In fact, the explaining power of the EMH becomes pale when confronting financial crisis.

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

Although, assuming that Efficient Market Hypothesis (EMH) holds, the responding stock market indices should reflect the harm caused by the earthquake, because, as EHM states that market prices fully reflect all publicly available information (Fama, 1970). Thus, it means that, if investors are rational and their decisions are not affected by noise traders, one can conclude that the decrease in stocks’ value is explainable by the damage of the catastrophe.

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).

The efficient market hypothesis (EMH) has been subject to professional and academic debate and analysis for many years, and refers to the theory proposing that stock prices show all information regarding a firm’s value. An efficient market is a market in which investors with the same information and similar investment goals compete actively (Sewell, 2012). Many private investors and investors aiming to make profits are involved with the stock market and often make low risk investments while aiming for high rates of return. However, the efficient market hypothesis states that it is impossible to consistently outperform the stock market as the market is able to quickly adjust to new information. The Efficient Market Hypothesis also addresses

Market efficiency requires that security prices react immediately in an unbiased way to the receipt of new information (Robert Shiller S1998). In other words, an efficient capital market is one in which stock prices fully reflect available information. In addition, there are three conditions for market efficiency; information flows freely, market is composed of rational investors where all competing against each other with the objective of maximizing wealth and there is no market imperfections. In efficient market, investors actively compete in the market based upon perceived mispricing derived from an analysis of

In modern financial economics, one of the most essential constructions , which plays a significant role in financing strategy, is efficient market hypothesis (henceforth EMH). Despite the fact that its first theoretical formulation, which was founded by Paul

Efficient-market hypothesis also states that it is impossible for investors to consistently out-perform the average market returns, or in other words, “beat the market”, because the market price is generally equal to or close to the fair value (Fama, 1965). It is impossible, therefore, for investors to earn higher returns through purchasing undervalued stocks. Investors can only increase their profits by trading riskier stocks (http://www.investopedia.com/). However, empirically speaking, there is a large quantity of real financial examples to support that stocks are not always traded at their fair value. On Monday October 19, 1987, the financial markets around the world fell by over 20%, shedding a huge value in a single day (Ahsan, 2012). It serves as example that market price can diverge significantly from its fair value. In addition, Warren Buffett has

The efficient market hypothesis theory states that it is impossible to “beat the market” because of the stock market efficiency causes the existing share prices to reflect all relevant information. Critically evaluate the above statement with reference to the three forms efficient market hypothesis.

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.

The belief of the ability to make a profit by beating the market is still an economically controversial issue. Some people believe that the market is efficient, so they cannot earn more as all the stocks are at their fair prices. However, others think differently. Efficient Market Hypothesis (EMH) is know as the financial theory first developed by Professor Eugene Fama in 1970. The theory has contributed to the views of not only individual investors but also financial institutions in the capital market about the traded assets’ price relied on relevant information. In fact, this EMH theory has been controversial and disputed.

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). 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.

This section will review the theories that will guide the study and their relevance to the study. The theories to be reviewed include; Efficient Market Hypothesis (EMH), Random Walk Theory and Behavioral Finance Theory.

The results of chi-square check showed a negative relationship among the length of net trade cycle and return on assets. In addition, this opposite relationship was found to be different across industries. A significance relationship for approximately half of industries studied showed that results might differ from industry to industry.