Market Efficiency: An Empirical Analysis of KSE 100 Index

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).

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 Tragedy of Macbeth by “William Shakespeare” incorporates some very drastic changes in human character and sparks many questions because of them. The main character Macbeth is plagued by these alterations and has conjured up many speculations as to why they happened. The theory that I will be investigating is that of wether or not Macbeth acted differently by free will or the witches intervention. In my own personal opinion I believe that Macbeth’s actions were the result of witchcraft and that he would have been fine if they didn’t get involved.

The weak-form efficiency cannot explain January effect. In semi-strong-form efficient market, to test this hypothesis, researchers look at the adjustment of share prices to public announcements such as earnings and dividend announcements, splits, takeovers and repurchases. As time goes, later tests tend to be not supportive to EMH. For instance, semi-strong-form efficiency cannot explain the pricing/earning effect. In strong-form efficiency, the highest level of market efficiency, Fama (1991) pointed out the immeasurability of market efficiency and suggested that it must be tested jointly with an equilibrium model of expected. However, perfect efficiency is an unrealistic benchmark that is unlikely to hold in practice.

In 1960s, Efficient Markets Hypothesis was further developed by Paul A. Samuelson (1965) and Eugene F. Fama(1970). In an efficient stock market, the price for any given stock effectively represents the expected net present value of all future profits. Which means, according to the efficient markets hypothesis (EMH), market prices can reflect all available information. After that, the EMH theory becomes one of the pillars of modern financial economics theory.

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.

At the end of the stock market game the stocks that I own was Amazon, Wal-Mart, AutoZone, Ford, Kohls, Toyota, Coca-Cola, and O'Reilly. These stocks have done good since I have bought them. These stocks had their ups and down throughout the whole game, but although they didn’t have it that bad . They may have gained money, but, they also, losted money at the same time. Also, there were days where the stock price went up and down since there were people out there that was willing to pay for the stock at a higher price, but there were others that didn’t think it was worth it at a higher price.

In March 2015, Japan’s Financial Markets Agency for the first time in its history set out Corporate Governance Code and a year earlier Stewardship Code. Even though some efforts towards corporate governance and transparency have been made in Japan previously, specifically introduction of dual system in 2003, they did not gain popularity. Only 40 out of 3,000 firms adopted this system immediately rising to 112 five years later. However, these codes were necessary due to the pressure from foreigners investing and doing business in Japan, several scandals such as Olympus 2011-2012 accounting scandal and ineffective, high cash holdings of Japanese companies (Eberhart, 2012).

When people think of the environment in Egypt, their first thoughts go over to the desert that makes up a large portion of the country. While Egypt’s main terrain is a desert, the Nile River offers lush vegetation along its banks when it floods seasonally (CIA World Factbook). Delicate honey, valuable papyrus paper, materials for textiles and chemical fuels harvested from the desert are valued resources from the environment in Egypt; these resources allow Egypt to successfully trade with other countries. Despite the resources the desert is able to provide for Egypt, the terrain also gives the country environmental constraints. Heated sandstorms are seasonal in Egypt, causing low air quality problems in the country (Khaled).

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 occurrence of stock market bubbles and crashes is often cited as evidence against the efficient market hypothesis. It is argued that new information is rarely, if ever, capable of explaining the sudden and dramatic share price movements observed during bubbles and crashes. Samuelson (1998) distinguished between micro efficiency and macro efficiency. Samuelson took the view that major stock markets are micro efficient in the sense that stocks are (nearly) correctly priced relative to each other, whereas the stock markets are macro inefficient. Macro inefficiency means that prices, at the aggregate level, can deviate from fair values over time. Jung and Shiller (2002) concurred with Samuelson’s view and suggested that waves of over- and

The phenomena behind equity risk premium discussion for 35 years, was first took place in Robert J. Schiller’s work done on volatility of equity prices. The research conduct by Schiller (1982), highlighted the difficulty of explaining the historical volatility of stock prices. The results of Shiller’s paper stunned the profession at first as most of economists felt discount rates were close to constant over time. The intuition behind the unpredictability of volatility, later named volatility puzzle by scholars who have studied this paradox as well. Just after 3 years from Schiller work on historical volatility, Mehra and Prescott (1985) introduced the equity premium puzzle. It is mainly based on the lack of evidence for a high risk premium in terms of consumption growth. In other words, investors require and have high returns which have low covariance with consumption growth. Using Schiller’s data collected on the volatility puzzle, they have found out that between 1889 and 1978, the consumption growth rate, the indicator for opportunity cost of investors is insufficient to explain 6% risk premium. Moreover, it was so high that the findings suggested only a risk premium of 0.35% on top of the risk-free rate. Behavioural finance approached this puzzle based on preference of investors. The decision making process of investors on investing on equities and why do they require high risk premium and fear equities this much. One of the leading papers on the

A STUDY ON STOCK MARKET RETURN, VOLATILITY AND CORRELATION ANALYSIS AMONG INDIAN & ASIAN STOCK MARKETS

The efficient market hypothesis is constantly being analyzed for its validity in the current market. There are a multitude of external factors contributing to the reluctance of relying on the EMH. Specifically, the rise of high frequency trading has significantly called into question the legitimacy of the efficient market. High

Market efficiency refers to the degree to which stock prices reflect information that affects price changes. The basic function of the securities market is the effective allocation of capital resources to promote the healthy and rapid economic development. The higher the effectiveness of the market, the more rational allocation of funds. Stock prices reflect information faster and more comprehensive, the securities market will be more efficiency. According to the reflection of stock prices to different information, it is possible to divided the efficiency of securities market into three levels, namely, weak-form efficiency, semi-strong-form efficiency and strong-form efficiency. The well-run stock market generally