...Weak form Efficiency and Calendar Anomalies: Comparison between Developed and Developing Equity Markets Syed Zulfiqar Ali Shah Assistant Professor-Finance, Department of Business Administration Faculty of Management Sciences, International Islamic University Islamabad E-mail: zulfiqar.shah@gmail.com Muhammad Husnain Ph.D Scholar (Finance) Mohammad Ali Jinnah University Islamabad Email: Husnain_ctn@yahoo.com Abstract Financial economists have continuously questioned the efficient market hypothesis especially in last decade. Major part of discussion is whether the equity markets are efficient and if not then up to what extent one can forecast the meaningful future movement of equity prices. On one side there are believers of random walk and contrary there are followers of chartist theories. Those who negate the random walk suggested that there exist anomalies in the equity markets and hence are not perfectly efficient. The major objective of this study is to check the weak form of efficiency and presence of calendar anomalies in equity markets of developing and developed countries. On the basis of most recent and relatively longer horizon (14 Year) data on daily basis and a range of powerful econometrics this study suggested that in broader sense both of developed and developing equity markets are weak form inefficient. Hence there is no remarkable difference in term of market efficiency in equity markets of developed and developing countries. Hence one can reject the random walk...
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...States and many other jurisdictions, however, "insiders" are not just limited to corporate officials and major shareholders where illegal insider trading is concerned but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of where a corporate insider "tips" a friend about non-public information likely to have an effect on the company's share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if the corporate insider trades on the basis of this information. Are Financial Markets Efficient? Market efficiency levels Eugene Fama identified three levels of market efficiency: 1. Weak-form...
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...Journal of Financial Economics 49 (1998) 283—306 Market efficiency, long-term returns, and behavioral finance Eugene F. Fama* Graduate School of Business, University of Chicago, Chicago, IL 60637, USA Received 17 March 1997; received in revised form 3 October 1997 Abstract Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique. 1998 Elsevier Science S.A. All rights reserved. JEL classification: G14; G12 Keywords: Market efficiency; Behavioral finance 1. Introduction Event studies, introduced by Fama et al. (1969), produce useful evidence on how stock prices respond to information. Many studies focus on returns in a short window (a few days) around a cleanly dated event. An advantage of this approach is that because daily expected returns are close to zero, the model for expected returns does not have a big effect on inferences about abnormal returns. * Corresponding author. Tel.: 773 702 7282; fax: 773 702 9937; e-mail: eugene.fama@gsb.uchicago. edu. The comments...
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...of capital market in Bangladesh mainly started with the beginning of trading activities of Dhaka Stock Exchange. It first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and started formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June 1962. Again in 13 May 1964 it was renamed as Dacca Stock Exchange Ltd. After the liberation war in 1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh. In 16 September 1986 was started. The formula for calculating DSE all share price index was changed according to IFC in 1 November 1993. The automated trading was initiated in 10 August 1998. In 1 January 2001 was started. Central Depository System was initiated in 24 January 2004. As of November 16, 2009, the benchmark index of the Dhaka Stock Exchange (DSE) crossed 4000 points for the first time, because of the debut of Grameen Phone in DSE. From the year 2007 the market capitalization is growing at a constant pace. The market is growing both in capitalization and trading volume. The growth is fueled by increased demand for financial assets and influx of liquid money. The growth is outpacing the growth of the national economy. Sudden rise of capitalization in DSE has raised the question, whether the growth has been healthy and market is functioning in a justifiable manner. [pic] Because economic development of a country is deeply related the development of country. If the market grows and...
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...Background Stock markets play a significant role in the wellbeing of an economy; thus efficient stock markets will positively affect the economy in a country. Concept of efficient markets was first coined by Fama(1970), describes an efficient market, as a market with fully available information to all investors, while at the same time stock prices fully reflect all the information available. Consequently, no individual investor will be able to reap profits above the average. Fama further describes the EMH in three form i.e. weak, semi-strong and strong form of efficiency. In Weak form efficient market stock prices have a random movement. We cannot use previous stock prices to predict future prices of stocks. We can beat the market by technical analysis or by analyzing company specific information. Unit root test is normally used to check weak form efficiency. In Semi strong form good or bad news are adjusted in stock prices and hence have no impact on stock market returns. Event study is usually conducted to check for semi form efficiency (Fama, 1991). Efficient market hypothesis is always being a controversial topic. Financial markets are not always efficient because there are some anomalies. Fama (1991) respond to anomalies that there is no room for seasonal movements in efficient market. But if these movements exist in stock markets, there are limitations in our statistical models which do not capture it. Financial anomalies mean the abnormal behavior of stock market in some situations...
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...Journal of Financial Economics 49 (1998) 283—306 Market efficiency, long-term returns, and behavioral finance Eugene F. Fama* Graduate School of Business, University of Chicago, Chicago, IL 60637, USA Received 17 March 1997; received in revised form 3 October 1997 Abstract Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to 1998 Elsevier Science S.A. All rights disappear with reasonable changes in technique. reserved. JEL classification: G14; G12 Keywords: Market efficiency; Behavioral finance 1. Introduction Event studies, introduced by Fama et al. (1969), produce useful evidence on how stock prices respond to information. Many studies focus on returns in a short window (a few days) around a cleanly dated event. An advantage of this approach is that because daily expected returns are close to zero, the model for expected returns does not have a big effect on inferences about abnormal returns. * Corresponding author. Tel.: 773 702 7282; fax: 773 702 9937; e-mail: eugene.fama@gsb.uchicago. edu. The comments of Brad Barber, David...
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...Introduction: Efficient Market Hypothesis (EMH) implies markets to be rational, incorporating new information to reflect in stock prices rapidly, considering direction and size of the share price movement. Consequently, leaving no opportunities for investors to beat the market and acquire abnormal returns. Predictable information raises the stock prices prior to its occurrence, and rapidly adjusting at the event date. Addendum to EMH, Random Walk Theory proposes market prices abide no pressure from past-price movements thus pursue a random course, making impossible to forecast future-price movements as they are an independent of past-prices. Fama (1970) establish three-level grading system portraying degree of market efficiency, based on investment approach endowing abnormal returns: Market anomalies are inconsistent with EMH and a consequence of deviations and incomprehensible patterns in smooth running of stock markets. Anomalies are statistically considerable and additionally proffer investors with risk adjusted economic returns. Once documented and scrutinized in literature, anomalies tend to disappear, overturn, or attenuate; doubting their subsistence in past, as being statistical irregularity, or have been arbitraged away. This essay will begin by defining limitations of CAPM and introduce three-factor model. Additionally, it will discuss the fundamental anomalies (Value and Size effects), calendar anomalies (January, Weekend and Time-of-the-month effects) and...
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...that the market always prices rationally. In fact, market prices are frequently nonsensical.” ------------------------------------------------- This report will analysis the statement by Warren Buffett, and it considers the contrasting evidence on the validity of the observation on the Efficient Markets Hypothesis. The report briefly outlines the forms of the Efficient Market Hypothesis, the report also analysis’s the evidence both seminal and recent on the theory relating to the three forms of the hypothesis. It also examines the theoretical role and motivation of analysts in creating market efficiency; lastly it looks at alternative perspectives on the pricing of securities. Introduction In 1984 Warren Buffett penned an article titled “The Superinvestors of Graham-and-Doddsville”, based on a speech he had given on the occasion of the 50th anniversary of his mentor Ben Graham’s legendary textbook, Security Analysis. In it, Buffett rejected the then growing (and now entrenched) view in academia that markets are ''efficient'' because ''stock prices reflect everything that is known about a company’s prospects and about the state of the economy.'' Warren Buffett argued against EMH, saying the preponderance of value investors among the world's best money managers rebuts the claim of EMH proponents that luck is the reason some investors appear more successful than others. (Hoffman, 2010) This report will either agree with Buffet or somewhat sit on the fence. A market is said...
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...Efficient Market Theory: An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments. * Market price is an unbiased estimate of the true value of the investment * All pertinent information are incorporated immediately * Key concepts: * Market price has not to be equal to the true value at every point in time * Equal chance that stocks are under or over valued * No group of investors should be able to consistently find under or over valued stocks * Self-correcting mechanism * Information and competition are the essential principles guiding market efficiency * Market participants behave rational - irrational optimists buy a stock, smart money sells, and when irrational pessimists sell a stock, smart money buys, thereby eliminating the effect of the irrational traders on market price. * Prices are not predictable Issues with EMT * For example, efficient markets theory may lead to drastically...
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...Efficient Market Hypothesis Efficient Market - Introduction An efficient capital market is a market that is efficient in processing information Assumptions for Market to be Efficient 1. 2. In other words, the market quickly and correctly adjusts to new information In an efficient market, the prices of securities observed at any time are based on “correct” evaluation of all information available at that time In an efficient market, prices immediately and fully reflect all available information Large no. of investors analyze and value securities for profit New information comes to the market in a random fashion 3. 4. Stock Prices adjust quickly to the new information Stock Prices should available information reflect all Definition "In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.“ - Professor Eugene Fama Efficient Market Hypothesis - Forms Efficient Market Hypothesis Weak Form Semi-Strong Form Strong Form The EMH Graphically All information, public & private • In this diagram, the circles represent the amount of information that each...
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...Markets and Information Market Efficiency Overview So far we have considered a number of asset pricing models These have all required that price is a good reflection of value Is this likely to be the case? How? Why? Week 5 FINS5513 2 Today Trend and predictability Efficient market hypothesis Implications Supporting evidence Behavioural biases Barriers to the EMH Anomalies Can we build a fully efficient market? Week 5 FINS5513 3 Market Efficiency Efficiency in engineering: the best possible use of the inputs. An efficient market: investors make the best possible use of information. A useful initial perspective: As speculators we are trying to predict where a stock price will be in the future. Do we know anything today that will help us make this prediction? Week 5 FINS5513 4 Price of GE 104 102 100 98 96 94 92 90 88 0 Week 5 20 40 FINS5513 60 80 100 5 Are Prices Predictable? There are apparently short-run trends If we know we are at the start of a downward trend, sell short If we know we are at the start of an upward trend, buy How do you know when a trend is starting? ending? Can we devise rules (statistical or “technical”)? Week 5 FINS5513 6 Trend and Predictability The price path is simulated: Price(Today) = Price(Yesterday) + x, where x is a standard normal random variable This process...
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...FINC3017 Investments and Portfolio Management Essay: Market Efficiency and Anomalies Topic：Stock price momentum: Jegadeesh and Titman (1993) Momentum anomaly and EMH Anomaly is a stock return deviation that challenge efficient market hypothesis (EMH). Jegadeesh and Titman (1993) theorise price momentum anomaly in the stock market for the first time. It contradicted to efficient market hypothesis thereby is widely debated. EMH states that no consistent excess return can be achieved since security prices fully reflect all available information (Fama 1970). Therefore, future prices cannot be predicted through technical analysis of past prices. If the hypothesis is true, passive investment strategy ought to be taken, because it is impossible to get abnormal return by aggressive trading. However, Jegadeesh and Titman show that stocks performed well over the previous 3 to 12 months tend to continue to perform well over 3 to 12 months holding periods. Buy past winners and short past losers earned statistically significant positive return of averaging 12.01% per year. Predictable price patterns and excess returns contradict the efficient market hypothesis. Investors and fund managers perform actively in pursuing abnormal profits. Literature review and the reason of anomaly A large number of literatures illustrate that momentum anomaly exist. Some important literatures are Chan, Jegadeesh and Lakonishok (1996), Conrad and Kaul (1998) and Moskowitz and Grinblatt (1999). Lee and Swaminathan...
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...Financial Market Definition of 'Financial Market' Broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade. Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investor's geographical location, knowledge of the markets or the profession of the participant. Investopedia explains 'Financial Market' Financial markets can be found in nearly every nation in the world. Some are very small, with only a few participants, while others – like the New York Stock Exchange (NYSE) and the forex markets – trade trillions of dollars daily. Most financial markets have periods of heavy trading and demand for securities; in these periods, prices may rise above historical norms. The converse is also true – downturns may cause prices to fall past levels of intrinsic value, based on low levels of demand or other macroeconomic forces like tax rates, national production or employment levels. Information transparency is important to increase the confidence of participants and therefore foster an efficient financial marketplace. Financial Markets: Capital Vs. Money Markets ...
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...QUESTION ONE. Maximisation of shareholders wealth is the main objective of a firm. Given that corporate ownership and control are often separated, is this a realistic goal? Shareholders are the owners of a corporation. The goal of a corporation is to maximise shareholders wealth, which sounds reasonable, since the owners (shareholders) want their company to be profitable. This goal was not an issue when the owners of the corporation were also the managers. However in the present day, corporate ownership has become increasingly diffused and while the shareholders may own the corporation, they do not run it. Rather a board of directors are elected who then appoint managers to oversee the day to day running of the company. This is called a separation of ownership and management and represents one distinctive feature of a corporation. In theory most financial managers would agree with the goal of maximising wealth for the owners of the corporation. In practice however, it could be suggested that managers are also concerned with their personal wealth, job security, lifestyle and other benefits such as golf club memberships, company vehicles and impressive offices all provided at company expense. Such concerns may make managers reluctant or unwilling to make decisions that while it may increase the owner’s wealth, may result in the loss of their job and damage to their personal wealth. This compromise between management’s personal goals and owner maximisation produces a less-than...
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...1 EFFICIENT MARKETS HYPOTHESIS Andrew W. Lo To appear in L. Blume and S. Durlauf, The New Palgrave: A Dictionary of Economics, Second Edition, 2007. New York: Palgrave McMillan. The efficient markets hypothesis (EMH) maintains that market prices fully reflect all available information. Developed independently by Paul A. Samuelson and Eugene F. Fama in the 1960s, this idea has been applied extensively to theoretical models and empirical studies of financial securities prices, generating considerable controversy as well as fundamental insights into the price-discovery process. The most enduring critique comes from psychologists and behavioural economists who argue that the EMH is based on counterfactual assumptions regarding human behaviour, that is, rationality. Recent advances in evolutionary psychology and the cognitive neurosciences may be able to reconcile the EMH with behavioural anomalies. There is an old joke, widely told among economists, about an economist strolling down the street with a companion. They come upon a $100 bill lying on the ground, and as the companion reaches down to pick it up, the economist says, ‘Don’t bother – if it were a genuine $100 bill, someone would have already picked it up’. This humorous example of economic logic gone awry is a fairly accurate rendition of the efficient markets hypothesis (EMH), one of the most hotly contested propositions in all the social sciences. It is disarmingly simple to state, has far-reaching consequences...
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