efficient market hypothesis

Abstract The aim of this paper is to explain the importance and implications of the use of Efficient Market Hypothesis (EMH) in emerging market with a view to see how portfolio assets are priced and the rationale behind it. The EMH describes a rational market where all relevant available information is reflected very quickly on prices. In an efficient market prices should react only to new unanticipated information, and since this is unpredictable, by definition, price changes must be unpredictable also. The EMH describes the case of an ideal stock market where actual prices fully reflect all relevant information. Consequently, the price and corresponding return fluctuations are not predictable and it's impossible for investors to make gains systematically. For many years, the EMH seemed to describe adequately the price behaviour in the world stock markets. Nevertheless, recent finding indicates otherwise. The research design of the paper is qualitative and content analysis is going to be use. The paper concludes that despite its shortcoming the EMH remains an open issue and it has help in deepening stock markets worldwide because of it acceptability. Therefore the paper recommends that more researchers should be encouraged to be conducted in emerging market of Africa especially that of Nigeria.

Lagos State University, Ojo Lagos, Nigeria Abstract Over time market players have developed much interest in factors that bring about movement or change in share price in the stock market either upward movement or downward movement several issues have been adduced for this over the years, some of which are rational and some are said to be irrational factors. The efficient market hypothesis and the whitenoise hypothesis were examined to measure point of similarities and divergence between the two hypotheses in this study. The secondary source of data was used for the purpose of the analysis and a multiple regression analysis was adopted. The model derived by the researcher shows that the whitenoise is equal to the error factor of the fist order of the regression. The regression model derived in the second order was tested and the result shows that the whitenoise(which measure the shock or volatility) is a strong factor in the price determination of share traded in the stock market. Also it revealed that it is not only market information that influence share price change as noted by the efficient market hypothesis but also sporadic shock or volatility in the market measured by the whitenoise variable. It was recommended that with positive and negative coefficient of the whiteniose determined the absolute value of the share price could be determined with the information content and the shock factor determined.

processes generate uncorrelated, generally nonstationary increments. Generally, a test for a martingale is therefore a test for uncorrelated increments. A detrended process with an x- dependent drift coefficient is generally not a martingale, and so we extend our analysis to include the class of (x,t)-dependent drift coefficients of interest in finance. We explain why martingales look Markovian at the level of both simple averages and 2-point correlations. And while a Markovian market has no memory to exploit and presumably cannot be beaten systematically, it has never been shown that martingale memory cannot be exploited in 3-point or higher correlations to beat the market. We generalize our Markov scaling solutions presented earlier, and also generalize the martingale formulation of the efficient market hypothesis (EMH) to include (x,t)- dependent drift in log returns. We also use the analysis of this paper to correct a misstatement of the ‘fair game’

processes generate uncorrelated, generally nonstationary increments. Generally, a test for a martingale is therefore a test for uncorrelated increments. A detrended process with an x- dependent drift coefficient is generally not a martingale, and so we extend our analysis to include the class of (x,t)-dependent drift coefficients of interest in finance. We explain why martingales look Markovian at the level of both simple averages and 2-point correlations. And while a Markovian market has no memory to exploit and presumably cannot be beaten systematically, it has never been shown that martingale memory cannot be exploited in 3-point or higher correlations to beat the market. We generalize our Markov scaling solutions presented earlier, and also generalize the martingale formulation of the efficient market hypothesis (EMH) to include (x,t)- dependent drift in log returns. We also use the analysis of this paper to correct a misstatement of the ‘fair game’

The Efficient Market Hypothesis and Identification in Structural VARs Lucio Sarno and Daniel L. Thornton F or a variety of reasons economists have long been interested in measuring the economy’s response to exogenous shocks. The shocks are thought to result, for example, from specific unexpected policy actions, sources that are exoge- nous to the domestic economy (such as an oil price shock), or sudden changes in technology. The eco- nomic structure (or data-generating process) that determines any economic outcome must be inferred from the observed data, and a structural interpreta- tion of the data is obtained from economic theory.

Efficient Market Hypothesis in European Stock Markets Abstract This paper reports the results of tests on the weak-form market efficiency applied to stock market indexes of France, Germany, UK, Greece, Portugal and Spain, from January 1993 to December 2007. We use a serial correlation test, a runs test, an augmented Dickey-Fuller test and the multiple variance ratio test proposed by Lo and MacKinlay (1988) for the hypothesis that the stock market index follows a random walk. The tests are performed using daily and monthly data for the whole period and for the period of the last five years, i.e., 2003 to 2007. Overall, we find convincing evidence that monthly prices and returns follow random walks in all six countries. Daily returns are not normally distributed, because they are negatively skewed and leptokurtic. France, Germany, UK and Spain meet most of the criteria for a random walk behavior with daily data, but that hypothesis is rejected for Greece and Portugal, due to serial positive correlation. However, the empirical tests show that these two countries have also been approaching a random walk behavior after 2003. (JEL G14; G15)

interest of the researchers which calls for an examination of the factors that influence the relationships and dynamic linkages between emerging stock markets. Such an understanding will provide a better grasp of the functioning of the emerging stock markets. As it is argued in the literature, the change in prices in the light of new information in the market and its random movement has been taken as a basis in all Efficient Market Hypothesis evaluations. If the adjustments in price are slow in comparison with the new information in the market, the asset prices will not reflect that information. If the adjustments in pricing are more or less than the norm, some investors would have an advantage over the other investors. The non-random movement in prices also leads to a violation of EMH as the investors, who can notice it, would have a considerable amount of profit.

FF14 Which definition of the information set is consistent with the Efficient Market Hypothesis The Efficient Market hypothesis (“EMH”) claims it is not possible to use an information set to consistently earn excess stock returns. Which statement about different forms of the information set is most accurate?

d en is a la jb eg , zo r a n b u b a š , v el im ir šo n je :theefficientmarkethypothesis: problems w it h in te r pr et at io n s o f em pir ic a l te st s financialtheoryandpractice36 (1) 53-72 (2012) 54 Abstract Despite many “refutations” in empirical tests, the efficient market hypothesis (EMH) remains the central concept of financial economics. The EMH’s resistance to the results of empirical testing emerges from the fact that the EMH is not a falsifiable theory. Its axiomatic definition shows how asset prices would behave under assumed conditions. Testing for this price behavior does not make much sense as the conditions in the financial markets are much more complex than the simplified conditions of perfect competition, zero transaction costs and free infor- mation used in the formulation of the EMH. Some recent developments within the tradition of the adaptive market hypothesis are promising regarding development of a falsifiable theory of price formation in financial markets, but are far from gi- ving assurance that we are approaching a new formulation. The most that can be done in the meantime is to be very cautious while interpreting the empirical evi- dence that is presented as “testing” the EMH.

predictable patterns that have been suggested, 5 my skepticism is based on somewhat different evidence. Surely, if market prices often failed to reflect rational estimates of the prospects of companies, and if markets consistently overreacted (or under-reacted) to underlying conditions, then professional investors, who are richly incentivized to outperform passive investors, should be able to produce excess returns. For me, the strongest evidence suggesting that markets are generally quite efficient is that pro- fessional investors do not beat the market. Indeed, the evidence accumulated over the past 30-plus years makes me more convinced than ever that our stock markets are remarkably efficient at adjusting correctly to new information. And I am increasingly convinced that the best investment advice for both individual and institutional equity investors is to buy a low-cost broad-based index fund that holds all the stocks com- prising the market portfolio. If prices were often irrational and if market returns were as predictable as some critics of the efficient market hypothesis believe, than surely actively managed investment funds should easily be able to outdistance a passive index fund that simply buys and holds the market portfolio.

Momentum strategy is a trading strategy, through which investors can predict future price movement of securities to exploit market efficiency by buying past “winner” stocks and selling past “loser” stocks by their returns. In this research we developed traditional price momentum and new alpha-based momentum strategy for the KOSPI listed stocks for the period 2000-2015. Yet, this is just a trading strategy and not an advanced statistical test, which other scholars implemented to test efficient market hypothesis in South Korea. The fact that our price momentum strategy did not reveal plausible profits, except the two cases where we could generate 0.074% and 0.089%, which may not cover the transaction costs – tempts us to wonder whether the Korean market is indeed efficient.

Finance and Accounting Department, Faculty of Law and Management, University of Mauritius, Reduit, Mauritius Abstract The present study investigates the efficiency of the forex market based on the theory of the Efficient Market Hypothesis in Mauritius, a well-diversified and emerging economy in the African region. Hence, this study considers the case of Mauritian forex market nominal spot rate daily data namely EUR/MUR, USD/ MUR, GBP/ MUR and JPY/ MUR over a time period of 5 years ranging from 2012 to 2016. The technique used for analysis is firstly concentrated on the use of Augmented-Dickey Fuller (ADF) and Philips Peron (PP) unit root to test the weak-form of efficiency and secondly, the Johansen Cointegration Test, the Granger Causality Test and Variance Decomposition are utilized to examine the existence of semi-strong form efficiency in the Mauritian foreign exchange market. Results indicated that the unit root test tested by ADF and PP unit root test support the weak form market as it follows a random walk process. Secondly, the Johansen Cointegration test reveals that there is no long run relationships among foreign exchange variables. However, the Granger causality test confirmed the existence of unidirectional and bidirec- tional relationships among the various exchange rates. Moreover, the Vari- ance Decomposition confirmed the presence of long run co-movements among the exchange rates. Therefore, both tests fail to support the semi- strong form market. This means that one exchange rate can predict one or more exchange rates which is against the semi-strong form market hypothesis.

“most”, jurists transform the imported concept of the efficient market in a way that extends its operationally. This less restrictive approach contrasts with the objective of theoretical foundation espoused by economists in order to better emphasize the plausibility of the effects of alleged public misrepresentation on prices. The Efficient Market Hypothesis is still mentioned, but is not used either as a theoretical constraint imposed by another field or as a neutral theory describing the financial facts. Rather, it becomes a conceptual referent, a theoretical starting point from which jurists must derive an appropriate efficiency more in line with their reality and their disciplinary context. This kind of adapted importation is often associated with an “action-based importation” 12 , in which the move of a notion across disciplines is governed by a need to solve complex problems. Since the imported concept is seen as a starting theoretical referent, this specific inter-disciplinarity can also generate the creation of new concepts.

Alexandra Gabriela ğiĠan a, ∗ a The Bucharest University of Economic Studies, 6, Piata Romana, 1 st district, Bucharest, postal code:010374, Romania Abstract The concept of efficiency is central to finance. For many years, academics and economics have studied the concept of efficiency applied to capital markets, efficient market hypothesis (EMH) being a major research area in the specialized literature. There are many opposite views regarding the EMH, some of them rejecting it, other supporting it. But how it all started and the way studies evolved during the last decade is very important. This survey examines the growing body of empirical research on efficient market hypothesis. The conclusion of this article is that testing for market efficiency is difficult and there is a high possibility that, because of changes in market / economic conditions, new theoretical model should be developed to take into consideration all changes. As a reasons, it is important to continue the empirical studies to decide if capital markets are or are not informational efficient.

These three types of market efficiency have their origin in empirical work, and early work lacked a micro foundation. Grossman (1976) filled the gap by developing a framework in which people’s private information is incorporated in a rational expectations market clearing price. In the games presented here, arguably, people obtain a private signal from examining the jar of nickels, 13 and thus the games test to what extent prices incorporate information in the sense of Grossman. 14 Because Grossman provided a micro foundation for the EMH, by association the games illustrate the efficient market hypothesis in Fama’s sense. To wit, because the private signals are based on public information it is reasonable to assert that the relevant EMH studied here is the semi- strong form.

is. The efficient market hypothesis (EMH) states that share prices reflect all the information available, and therefore makes alpha generation impossible. Believers in EMH claim the only way to obtain higher returns is to take on riskier investments (i.e. increasing beta). However, in rare cases, we have seen active investors able to generate alpha while keeping risk near that of

In this final project, the author concluded that the Indonesian stock market is not weak form efficient. The next step in test of market efficiency after conducting the weak form test is to test whether or not it is semi‐strong form efficient. To test this hypothesis, Ross’s multifactor model is employed and it is analyzed using panel data. The author chose 8 stocks from 8 different sectors listed on the LQ45 index with the highest market capitalization as a representation of the Indonesian stock market and the macroeconomic factors that are included in this final project are JCI, oil, inflation, and foreign exchange rate. The result suggests that stock returns can be predicted by the 4 macroeconomic factors and hence, it is not semi‐strong form efficient. The implication of the result is the fact that fundamental analysis can be used to gain abnormal returns in the Indonesian stock market. The results of this final project suggest that the Indonesian stock market is not weak form efficient and it is not semi‐strong form efficient. Does this mean that the efficient market hypothesis is rejected? The answer is no, non randomness in return does not imply inefficiency even though it is a supportive evidence. On the semi‐

Keywords: EMH; Calendar Anomalies; January Effect; Weekdays Effect; France; Germany; Italy; Spain 1. INTRODUCTION n the stock market an important principle used to measure the efficiency is the correlation between prices and all the information present in a market. The Efficient Market Hypothesis (EMH), also called Random Walk Theory (Kendall, 1953), is the consideration that the equity value of a listed firm reflects all data regarding the business value. “Efficient market” was presented in 1965 by Eugene Fama. He suggested that stocks always trade at fair value. This make impossible for investors to buy undervalued stocks or to sell stocks at overestimated prices. A market is efficient if prices adjust rapidly and, on average, without bias to new info. Thus, there isn’t a reason to believe that prices are excessively high or low. So, in an efficient context it is impossible to beat the market. Investors pay a fair price. Based on this theory, an investor’s only concern is selecting a particular risk- returns trade-off.

he financial literature is replete with attempts in predicting stock prices. In contrast to the Efficient Market Hypothesis, researchers have identified various factors that can influence stock returns and hence have used them for prediction purposes. The quality of results has varied, but the efforts continued. Going back to Graham & Dodd ( 1934 ) where they disregarded the fact that “good stocks (or blue chips) were sound investments regardless of the price paid for them”, they distinguished between speculation and investment, and consequently emphasized on factors like management quality, earnings, dividends, capital structure and interest cover. Their work focused on building a healthy portfolio and the characteristics of their constituents. Implicit in their work was the theme that it pays to be careful while choosing stocks

Isoquantile shapes for BET differ from circles in multiple lags (of 2, 3, 4, 11 and 13 weeks): the deviations are distinctive, which suggests short-time dependency in the data. The isoquantile shapes of the PX Index, BUX and JSX Composite Index deviate from circles constantly: for PX it’s the longer lags of 4, 7, and 9–15 weeks, for BUX it’s 3 and 5–16 weeks. Isoquantiles for the JSX Composite Index don’t resemble a circle for any lag. Observing a systematic deviation from independence between current values and lagged ones, we can postulate that the efficient market hypothesis doesn’t apply to markets described by these indices.