Examining Market Efficiency In Capital Market Theory

The term market efficiency in capital market theory is used to explicate the grade to which stock monetary values reflect all available, relevant information. The construct of Efficiency Market Hypothesis ( EMH ) is based on the statements put frontward by Samuelson ( 1965 ) that awaited monetary value of an plus fluctuate randomly. Fama ( 1970 ) presented a formal reappraisal of theory and grounds for market efficiency and later revised it further on the footing of development in research ( Fama 1991 ) . Efficiency of equity markets has of import deductions for the investing policy of the investors.

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The efficient market hypothesis is related to the random walk theory. The thought that plus monetary values may follow a random walk form was introduced by Bachelier in 1900 ( Poshakwale 1996 ) . The random walk hypothesis is used to explicate the consecutive monetary value alterations which are independent of each other. The construct of Efficiency Market Hypothesis ( EMH ) is based on the statements put frontward by Samuelson ( 1965 ) that awaited monetary value of an plus fluctuate randomly. Fama ( 1970 ) presented a formal reappraisal of theory and grounds for market efficiency and later revised it further on the footing of development in research he classifies market efficiency into three signifiers – weak, semi-strong and strong.

In its weak signifier efficiency, equity returns are non serially correlated and have a changeless mean. If market is weak signifier efficient, current monetary values to the full reflect all information contained in the historical monetary values of the plus and a trading regulation based on the past monetary values can non be developed to place miss-priced assets.

Market is semi-strong efficient if stock monetary values reflect any new publically available information outright. There are no undervalued or overvalued securities and therefore, trading regulations are incapable of bring forthing superior returns. When new information is released, it is to the full incorporated into the monetary value instead quickly.

The strong signifier efficiency suggests that security monetary values reflect all available information, even private information. Insiders profit from trading on information non already incorporated into monetary values. Hence the strong signifier does non keep in a universe with an uneven playing field.

International Business & A ; Economics Research Journal – March 2007 Volume 6, Number 3 57 Weak Form Efficiency In Indian Stock Markets Rakesh Gupta, ( E-mail: r.gupta @ cqu.edu.au ) , Central Queensland University, Australia Parikshit K. Basu, ( E-mail: pbasu @ csu.edu.au ) , Charles Sturt University, Australia

Surveies proving market efficiency in emerging markets are few.

Poshakwale ( 1996 ) showed that Indian stock market was weak signifier inefficient he used daily BSE index informations for the period 1987 to 1994.

Barua ( 1987 ) , Chan, Gup and Pan ( 1997 ) observed that the major Asiatic markets were weak form inefficient.

Similar consequences were found by Dickinson and Muragu ( 1994 ) for Nairobi stock market

Cheung et Al ( 1993 ) for Korea and Taiwan

Ho and Cheung ( 1994 ) for Asiatic markets.

Barnes ( 1986 ) showed a high grade of efficiency in Kuala Lumpur market. Groenewold and Kang ( 1993 ) found Australian market semi-strong signifier efficient.

Some of the recent surveies, proving the random walk hypothesis ( in consequence proving for weak signifier efficiency in the markets ) are ; Korea ( Ryoo and Smith, 2002 ; this survey uses a discrepancy ratio trial and happen the market to follow a random walk procedure if the monetary value bounds are relaxed during the period March 1988 to Dec 1988 ) , China, ( downwind et al 2001 ; happen that volatility is extremely relentless and is predictable, writers use GARCH and EGARCH theoretical accounts in this survey ) , Hong Kong ( Cheung and Coutts 2001 ; writers use a discrepancy ratio trial in this survey and happen that Hang Seng index on the Hong Kong stock exchange follow a random walk ) , Slovenia ( Dezlan, 2000 ) , Spain ( Regulez and Zarraga, 2002 ) , Czech Republic ( Hajek, 2002 ) , Turkey ( Buguk and Brorsen, 2003 ) , Africa ( Smith et al. 2002 ; Appiah-kusi and Menyah, 2003 ) and the Middle East ( Abraham et al. 2002 ; this survey uses discrepancy ratio trial and the tallies trial to prove for random walk for the period 1992 to 1998 and happen that these markets are non efficient ) .

Weak-form market efficiency in European emerging and developed stock markets

ANDREW C. WORTHINGTON and HELEN HIGGS*

School of Economics and Finance, Queensland University of Technology, Brisbane, Australia

Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with figure 159.

Evidence on Weak Form Efficiency

and Day of the Week Effect in

the Indian Stock Market

SUNIL POSHAKWALE*

FINANCE INDIA

Vol. X No. 3, September 1996

Pages- 605-616

International Business & A ; Economics Research Journal – March 2007 Volume 6, Number 3 57 Weak Form Efficiency In Indian Stock Markets Rakesh Gupta, ( E-mail: r.gupta @ cqu.edu.au ) , Central Queensland University, Australia Parikshit K. Basu, ( E-mail: pbasu @ csu.edu.au ) , Charles Sturt University, Australia

Faculty of Commerce

Faculty of Commerce – Documents

University of Wollongong Year 2006

Weak-Form Market E_ciency in Asiatic

Emerging and Developed Equity

Markets: Comparative Trials of Random

Walk Behaviour

A. C. Worthington_ H. Higgsy

The Pakistan Development Review

45: 4 Part II ( Winter 2006 ) pp. 1029-1040

Stock Market Volatility and Weak-form Efficiency:

Evidence from an Emerging Market

ABID HAMEED and HAMMAD ASHRAF*

If the equity market in inquiry is efficient researching to happen miss-priced assets will be a waste of clip. In an efficient market, monetary values of the assets will reflect markets best estimation for the hazard and expected return of the plus, taking into history what is known about the plus at the clip. Therefore, there will be no undervalued assets offering higher than expected return or overvalued assets offering lower than the expected return. All assets will be suitably priced in the market offering optimum wages to hazard. Hence, in an efficient market an optimum investing scheme will be to concentrate on hazard and return features of the plus and/or portfolio. However, if the markets were non efficient, an investor will be better off seeking to descry victors and also-rans in the market and right designation of miss-priced assets will heighten the overall public presentation of the portfolio Rutterford ( 1993 ) . EMH has a double map – as a theoretical and prognostic theoretical account of the operations of the fiscal markets and as a tool in an feeling direction run to carry more people to put their nest eggs in the stock market ( Will 2006 ) . The apprehension of efficiency of the emerging markets is going more of import as a effect of integrating with more developed markets and free motion of investings across national boundaries. Traditionally more developed Western equity markets are considered to be more efficient. Contribution of equity markets in the procedure of development in developing states is less and that resulted in weak markets with limitations and controls ( Gupta, 2006 ) In the last three decennaries, a big figure of states had initiated reform procedure to open up their economic systems. These are loosely considered as emerging economic systems. Emerging markets have received immense influxs of capital in the recent yesteryear and became feasible option for investors seeking international variegation. Among the emerging markets India has received itaˆYs more than just portion of foreign investing influxs since its reform procedure began. One ground could be the Asian crisis which affected the fast developing Asiatic economic systems of the clip ( besides some times jointly called aˆztiger economiesaˆY ) . India was non affected by the Asiatic crisis and has maintained its high economic growing during the period ( Gupta and Basu 2005 ) .

The efficient market hypothesis is related to the random walk theory. The thought that plus monetary values may follow a random walk form was introduced by Bachelier in 1900 ( Poshakwale 1996 ) . The random walk hypothesis is used to explicate the consecutive monetary value alterations which are independent of each other. Fama ( 1991 ) classifies market efficiency into three signifiers – weak, semi-strong and strong. In its weak signifier efficiency, equity returns are non serially correlated and have a changeless mean. If market is weak signifier efficient, current monetary values to the full reflect all information contained in the historical monetary values of the plus and a trading regulation based on the past monetary values can non be developed to place miss-priced assets. Market is semi-strong efficient if stock monetary values reflect any new publically available information outright. There are no undervalued or overvalued securities and therefore, trading regulations are incapable of bring forthing superior returns. When new information is released, it is to the full incorporated into the monetary value instead quickly. The strong signifier efficiency suggests that security monetary values reflect all available information, even private information. Insiders profit from trading on information non already incorporated into monetary values. Hence the strong signifier does non keep in a universe with an uneven playing field. Studies proving market efficiency in emerging markets are few. Poshakwale ( 1996 ) showed that Indian stock market was weak form inefficient ; he used daily BSE index informations for the period 1987 to 1994. Barua ( 1987 ) , Chan, Gup and Pan ( 1997 ) observed that the major Asiatic markets were weak form inefficient. Similar consequences were found by Dickinson and Muragu ( 1994 ) for Nairobi stock market ; Cheung et Al ( 1993 ) for Korea and Taiwan ; and Ho and Cheung ( 1994 ) for Asiatic markets. On the other manus, Barnes ( 1986 ) showed a high grade of efficiency in Kuala Lumpur market. Groenewold and Kang ( 1993 ) found Australian market semi-strong signifier efficient. Some of the recent surveies, proving the random walk hypothesis ( in consequence proving for weak signifier efficiency in the markets ) are ; Korea ( Ryoo and Smith, 2002 ; this survey uses a discrepancy ratio trial and happen the market to follow a random walk procedure if the monetary value bounds are relaxed during the period March 1988 to Dec 1988 ) , China, ( downwind et al 2001 ; happen that volatility is extremely relentless and is predictable, writers use GARCH and EGARCH theoretical accounts in this survey ) , Hong Kong ( Cheung and Coutts 2001 ; writers use a discrepancy ratio trial in this survey and happen that Hang Seng index on the Hong Kong stock exchange follow a random walk ) , Slovenia ( Dezlan, 2000 ) , Spain ( Regulez and Zarraga, 2002 ) , Czech Republic ( Hajek, 2002 ) , Turkey ( Buguk and Brorsen, 2003 ) , Africa ( Smith et al. 2002 ; Appiah-kusi and Menyah, 2003 ) and the Middle East ( Abraham et al. 2002 ; this survey uses discrepancy ratio trial and the tallies trial to prove for random walk for the period 1992 to 1998 and happen that these markets are non efficient ) .

Survey of the stock return bring forthing procedure has long been dominated by involvement in its random walk belongingss. Justification for such involvement is non difficult to happen, given that the presence ( or absence ) of a random walk has of import deductions for investors and trading schemes, fund directors and plus pricing theoretical accounts, capital markets and market efficiency, and accordingly fiscal and economic development as a whole. Trading schemes, for illustration, differ when returns are characterised by random walks or by positive autocorrelation ( or continuity ) over short skylines and negative autocorrelation ( or intend reversion ) over long skylines. In this case, and as the investing skyline lengthens, an investor would put more ( less ) in stocks if the comparative hazard antipathy is greater ( less ) than integrity, than if the returns were serially independent. Similarly, random walks in stock returns are important to the preparation of rational outlooks theoretical accounts and the testing of ( weak-form ) market efficiency. In an efficient market the monetary values of stocks to the full incorporate all relevant information and hence stock returns will expose unpredictable behavior. In stock monetary values non characterised by a random walk, the return bring forthing procedure is dominated by a impermanent constituent and hence future returns can be predicted by the historical sequence of returns. Last, the ability of stock markets to play the function that is ascribed to them – pulling foreign investing, hiking domestic economy and bettering the pricing and handiness of capital – depends upon the presence of random walks. A market following a random walk is consistent with equity being suitably priced at an equilibrium degree, whereas the absence of a random walk infers deformations in the pricing of capital and hazard. This has of import deductions for the allotment of capital within an economic system and therefore overall economic development.

This paper examines the random walk behavior of a big figure of Asiatic emerging and developed markets. Past surveies of random walks and market efficiency in Asiatic equity markets have tended to concentrate on a individual, frequently developed, market [ see, for illustration, Groenewold and Kang ( 1993 ) , Ayadi and Pyun ( 1994 ) , Lian and Leng ( 1994 ) , Huang ( 1995 ) , Groenewold and Ariff ( 1998 ) , Los ( 2000 ) , Lee et Al. ( 2001 ) and Ryoo and Smith ( 2002 ) ] . The current analysis besides includes a figure of alternate, though complementary, proving processs. With few exclusions, old research has relied upon a individual, frequently inexact, testing process [ see, for case, Poshakwale ( 1996 ) , Karemara et Al. ( 1999 ) , Ryoo and Smith ( 2002 ) and Abraham et Al. ( 2002 ) ] . Finally, this paper uses daily informations to observe misdemeanors of the random walk hypothesis probably to be obscured at longer trying frequences. About all earlier work has specified returns as hebdomadal or longer [ see, for illustration, Karemara et Al. ( 1999 ) , Los ( 2000 ) , Abraham et Al. ( 2002 ) ] . The balance of the paper is divided into four chief countries. Section 2 provides a description of the informations employed in the analysis. Section 3 discusses the empirical methodological analysis used. The consequences are dealt with in Section 4. The paper ends with some reasoning comments in Section 5.

Efficient markets hypothesis ( EMH ) asserts that in an efficient market monetary value to the full reflect available information. This implies that investor can anticipate to gain simply hazard adjusted return from an investing as monetary values move outright and indiscriminately to any new information. Efficiency is defined at three different degrees, harmonizing to the degree of information reflected in the monetary values. Three degrees of EMH are expressed as follows: weakform, semi-strong and strong signifier. Weak-form version of EMH asserts that monetary values of fiscal assets reflect all information contained in the past monetary values. Semi-strong version postulates that monetary values reflect all the publically available information. Last, strong-form postulates that monetary values of fiscal assets reflect, in add-on to information on yesteryear monetary values and publically available information, inside information [ Fama ( 1970, 1991 ) ] .

Weak-form market efficiency in European emerging and developed stock markets

ANDREW C. WORTHINGTON and HELEN HIGGS*

School of Economics and Finance, Queensland University of Technology, Brisbane, Australia

Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with figure 159.

Evidence on Weak Form Efficiency

and Day of the Week Effect in

the Indian Stock Market

SUNIL POSHAKWALE*

FINANCE INDIA

Vol. X No. 3, September 1996

Pages- 605-616

International Business & A ; Economics Research Journal – March 2007 Volume 6, Number 3 57 Weak Form Efficiency In Indian Stock Markets Rakesh Gupta, ( E-mail: r.gupta @ cqu.edu.au ) , Central Queensland University, Australia Parikshit K. Basu, ( E-mail: pbasu @ csu.edu.au ) , Charles Sturt University, Australia

Faculty of Commerce

Faculty of Commerce – Documents

University of Wollongong Year 2006

Weak-Form Market E_ciency in Asiatic

Emerging and Developed Equity

Markets: Comparative Trials of Random

Walk Behaviour

A. C. Worthington_ H. Higgsy

The Pakistan Development Review

45: 4 Part II ( Winter 2006 ) pp. 1029-1040

Stock Market Volatility and Weak-form Efficiency:

Evidence from an Emerging Market

ABID HAMEED and HAMMAD ASHRAF*

Decision

The consequences of this analysis are consistent with the generalization that emerging markets are improbable to be associated with the random walks required for the premise of weak-form market efficiency. However, Hungary, as the most institutionally mature of these markets, does fulfill this standard. However, the grounds sing developed markets is less conclusive with some markets following random walks while others do non. It is non hard to apologize why equity markets in Germany and the United Kingdom are weak form efficient ; it is instead less easy to make so for the smaller markets of Ireland, Portugal and Sweden. This presents an interesting avenue for future research, as does the effort to analyze whether market efficiency has improved over clip in any or all of these markets.

However, the consequences pleasingly indicate that the assorted trials for random walks, frequently embracing more and less rigorous standards and premises, supply by and large consistent grounds on the presence of random walks. This should supply some reassurance to future empirical research workers in this country.

In this paper an effort has been made to pattern the volatility of stock returns for the Pakistani stock market and to prove for weak-form efficiency. Consequences point out that returns exhibit continuity and volatility bunch. Weak-form efficiency hypothesis is rejected as it is found that past information helps in foretelling future monetary values. Average discrepancy hypothesis does non keep for Pakistani stock market as no grounds is found that investors are rewarded for taking increased hazard.

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