Market Efficiency Tests: Five Anomalies Exist in Both Us and Australian Markets

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.

Though a study of cycles offers the trader a broader picture of the stock market’s performance during various periods, it is difficult to place trades based on these numbers alone.

When establishing financial prices, the market is usually deemed to be well-versed and clever. In a stock market, stocks are based on the information given and should be priced at the accurate level. In the past, this was supposed to be guaranteed by the accessibility of sufficient information from investors. However, as new information is given the prices would shift. “Free markets, so the hypothesis goes, could only be inefficient if investors ignored price sensitive data. Whoever used this data could make large profits and the market would readjust becoming efficient once again” (McMinn, 2007, ¶ 1). This paper will identify the different forms of EMH, sources supporting and refuting the EMH and finally

Financial stocks are the shares issued by financial industries. With the development of global economics, the volatility of global stocks market reflects the economic situation across a number of countries. As a result, each nation’s fluctuation of stocks plays a significant role in its own economy. Furthermore, the financial stocks that act as an important sector of the whole stock market are caused fluctuating by a large number of factors. Without exception, there is a great number of reasons for the volatility of Australian financial stocks, which cause the whole financial share market fluctuating unsteadily in Australia as well. The purpose of this report is to discover the most influential cause of financial stocks volatility in Australia. Moreover, This report will analyse three main factors: a combination of three financial instruments, legal framework and inancial industry fundamentals, which influence the volatility of Australian financial stocks.

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 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.

The relationship between published financial or accounting information and capital market is a complex one. The capital market is affected by analyst’s forecasts and expectations putting pressure on companies to adjust their reported earning numbers. Share prices are affected by the way corporate profits and balance sheet data

Samuelson has offered the dictum that the stock market is ‘‘micro efficient’’ but ‘‘macro inefficient.’’ That is, the efficient markets hypothesis works much better for individual stocks than it does for the aggregate stock market. In this article, we review a strand of evidence in recent literature that supports Samuelson’s dictum and present one simple test, based on a regression and a simple scatter diagram, that

Investors in volatility market should make no move waiting for the market to steady it self as volatility doesn’t change stocks valuations. Based on analyst’s opinion most of them recommend

Kendall (1950) initially put forward empirical support for the view that stock prices do not behave in a systematic manner but are more akin to a random walk. Foley (1991) supported Kendall’s argument. According to Lo and McKinley (1999), stock prices always fully reflect all the available information and no profit can be made from information based trading. This leads to a random walk where the more efficient the market, the more random the sequence of price

Efficient Market Hypothesis was firstly brought forward by E. Fama in 1960s. Its main believing is in that security prices fully reflect all available information in an efficient market, which allows investors to earn no above average risk-adjusted return (Fama, 1965). Although some technical studies and opportunistic investors have stretched hard in searching for proofs to challenge the efficient market hypothesis, and to prove above average returns could be gained by predicting the future price using the existing information, their efforts result only in finding of the ¡®anomalies¡¯ in the market which are destined to self-destructing in the long run or being proved worthless taken the transaction cost.

Dividend announcements and their impact on share prices can be explained by the semi strong form of the efficient market hypothesis (EMH). Efficient market hypothesis implies that the only thing that may impact the stock prices is new information, since all other possibly influencing parameters are already included in the firm’s stock price (Palan, 2004).The efficient market hypothesis may be divided into three forms: the weak form, the semi-strong form, and the strong form. The weak form implies that share prices bear or reflect the past prices and trade volume information, the semi-strong form adds publicly available information to the weak form, and the strong form adds even insider information to the efficiency approach (Harder, 2008).

Main Result Conclusion Introduction • The market βs of Sharpe-Litner, and Breedon’s c onsumption βs show little relation of the Cross-S ectional average returns on U.S common stocks. • Empirical variables determined average returns are: – Size,

- To investigate the impact of the day of the week‘s evidence for the Efficient Market Hypothesis

Efficient market hypothesis (EMH) has been developed by a renowned economist, Eugene Fama. According to EMH, the market is considered as efficient if