...Efficient Market Hypothesis * EMH emerged in the 1950s due to early application of computers in analysis of time series behaviour of economic variables. * The general idea of EMH is that markets incorporate all available information into all prices and the assumptions are that there is elimination of riskless profit opportunities and all prices of stocks are equal to their fundamental value and we have Rational expectations: agents use optimal forecasts based on all information available so as to minimise the forecast error. * In 1970 Eugine Fama defined EMH and divided it into 3 main forms. There are three main forms of EMH that are usually tested by researchers. * Weak form states that past prices have no influence on current prices or in other words it is impossible to use past information to predict future prices since all this info is already priced into stocks * Semi strong form states that market efficiency takes into account all publicly available information, past and present, such as financial reports, public announcements * Strong form states that all information, including that of insiders is reflected in prices and therefore cannot be useful in price forecasting * Early tests which focus on the performance of investment analysts and mutual funds tend to support the EMH in that past good performance does not indicate that an advisor or mutual fund will perform well in the future. For example – Jensen (1967) measures the predictive...
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...prices of eminent market indices from a time period 2004-2013.The stock returns have been subjected to unit root tests such as the Augmented Dickey Fuller test and a panel unit root test. Additionally the existence of random walk for these stock markets has also been examined through the Jarque-Bera statistic. The results indicate information inefficiency in the time period under study for all indices. Investors can therefore predict future prices on the basis of historical information, and receive excessive returns. The results have implications for developing economies wherein the government has to ensure that all asset related information be made public, to curb state interference. Introduction The concept of Efficient Market Hypothesis (EMH) holds special importance in the field of Finance, especially Capital markets. This hypothesis postulates that markets are informationally efficient. This asserts that the price of any security will fully reflect all the information that is available to the investors. That being said, one cannot consistently achieve returns that are excess of the average market returns on a risk-adjusted basis, with information available at the time of investment. First developed separately by Eugene F. Fama and Paul A. Samuelson, the concept assumes that the investors need not be rational. In an efficient market, investors may either overreact or under react to newly available information. The investor’s reactions are random, such that the price changes are...
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...could easily be mistaken as being a success. A deeper analysis of the premises of PAT, its questionable scientific status, and the groups upon whom this theory has appealed to would suggest that it is flawed on many levels and is little more than an argument for deregulation and market capitalism. This opposes its claim to be a useful theory used regularly by those concerned with the effects of accounting policy on the status of the firm. The Premises of Positive Accounting Theory Positive Accounting Theory finds its roots with the Efficient Market Hypothesis (EMH). The EMH was developed by Fama in the 1960’s and is based on economic principles and assumes a perfect market where there is information symmetry and no transaction costs. The semi strong form of EMH argues that capital markets will reflect all information that is publicly available and it is this form that Watts and Zimmerman claim to be predominant. The EMH was used in a study performed by Ball and Brown during the same period. The Ball and Brown study rejected the argument put forward by normative theorists that present accounting results were misleading and irrelevant and stated that historical cost accounting is actually useful (Deegan 2000). This was because their study demonstrated that unexpected accounting earnings produced abnormal returns in capital markets. This was also the case for unexpected poor earnings as they produced abnormal losses in capital markets. This was measured...
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...returns. It is suggested that, in such a market, investors will seek information and take immediate action to buy or sell securities based on any new information. As a result, information will be impounded very quickly in market prices. Market efficiency may be improved by an increase in the quantity and quality of information that is made publicly available, and a reduction in restrictions on insider trading. Statement 1 * New information regarding securities comes to the market in random fashion. * Profit maximising investors cause security prices to adjust rapidly to reflect the effect of new information. Methods used to test for market efficiency Market efficiency may be classified according to the three research methodologies employed to assess the efficiency of a market: * Tests of return predictability are undertaken to ascertain whether future returns can be predicted on the basis of factors such as past returns, the time of the year or the company’s book to market ratio. *...
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...The Australasian Accounting Business & Finance Journal, February 2007 Gaffikin: Accounting Research and Theory: the age of neo-empiricism. Vol. 1, No.1.pp. 1-19. Accounting Research and Theory: The age of neo-empiricism Michael Gaffikin, School of Accounting & Finance, University of Wollongong ABSTRACT The theorising in accounting prior to 1970 was rejected as not providing sufficiently general theories. Informed by theories in economics and finance (and other disciplines such as psychology) and with the aid of computers, attempts to theorise accounting took a new direction. Large data collection and analysis emphasized a purportedly more systematic empirical approach to developing theory. Key words: accounting; neo-empiricism; capital markets research; behavioural finance; efficient markets hypothesis; positive accounting theory INTRODUCTION Around 1970 there was a dramatic change in the approach to accounting research. Several reasons have been suggested for this change in methodological direction by those reviewing the development of accounting thought. To many, a major distinction is a change in direction away from attempts to prescribe a theory of accounting to developing theory from a description of extant practices. To advocates of the latter, previous attempts to develop a theory of accounting were futile as there could never be agreement over many of the inputs into a theory such as the postulates, principles but most specifically the assumptions. Although a...
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...You are given a notional SGD 100,000 to invest on the Singapore stock market in shares listed on the FTSE ST ALL Share index. You need to split your investment 50:50 between two portfolios of shares, one where you selected the shares by technical analysis and the other by fundamental analysis. Your aim is to beat the market with both portfolios. It is important you can demonstrate that you know the difference between these methods. You need to compare and contrast the two portfolios and you need to make explicit reference to EMH in your analysis. Assignment Requirements You are given a notional SGD100,000 to invest in the Singapore stock market. Use historical and live market data from Monday, 3 November 2014 to Friday, 13 February 2015. This means that you are going to have to use short-term investment strategies. You have 2 weeks to finalize the report, but you should progressively do parts of the report as you trade during this period. The aim is for you to try to beat the market. The market is represented by the FTSE ST ALL Share Index – if you do not ‘beat the market you will not lose marks, most people will find it impossible to do better than experienced investors . You must calculate the return on the market from your first trade to your last trade in order to determine whether you have beaten the market or not. The shares MUST be listed on the FTSE ST ALL Share Index. You are not allowed to use derivatives, such as options or any short selling. 50% of your investment...
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...Article 1 Title of Journal Article: Testing for the Weak-Form Market Efficiency of the Dar es Salaam Stock Exchange DETAILS:- Author(s)- Year- Name of Journal- Volume- Issue- Page number | Authors : Yilmaz Guney - University of Hull, Gabriel Vitus Komba - Mzumbe University, School of BusinessDate: October 21, 2015. | - RESEARCH OBJECTIVES(s)-RESEARCH QUESTION(s) | This study investigates into the weak-form efficiency of the Dar es Salaam stock exchange (DSE), a frontier market, in Tanzania. | - HYPOTHESES- VARIABLES:Eg: Dependent variables, Independent variables | The weak-form efficiency of the Dar es Salaam stock exchange (DSE), a frontier market, in Tanzania.Dependent Variable: Weak-form efficiency of DSE | METHODOLOGY:Eg: Scope of study, Respondent type & number, Analysis used | The study covers the period from January 2007 to December 2014. To establish the consistency and robustness of the obtained conclusions, we employ different tests (i.e., Augmented Dickey-Fuller test, variance-ratio test, and Ranks and Sign test) to examine the hypothesis that the returns based on the price and return indices follow a random walk process | FINDINGS & DISCUSSION:Eg: Types of relationships (support or not), Reliability & variance | Wright (2000) shows that ranks and sign tests can be exact, and have better power properties than the conventional variance-ratio tests. Moreover, they demonstrate that rank-based variance-ratio tests have, generally, more power than...
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...136 Positive Accounting Theory and Science JCC Journal of CENTRUM Cathedra ™ Positive Accounting Theory and Science by M. Humayun Kabir Senior Lecturer, Faculty of Business Auckland University of Technology, Auckland, New Zealand Abstract This paper examines the development of positive accounting theory (PAT) and compares it with three standard accounts of science: Popper (1959), Kuhn (1996), and Lakatos (1970). PAT has been one of the most influential accounting research programs during the last four decades. One important reason which Watts & Zimmerman (1986) have used to popularize and legitimize their approach is that their view of accounting theory is the same as that used in science. Thus, it is important to examine how far accounting has been successful in imitating natural science and how the development of PAT compares with the three standard accounts of science. This paper shows that accounting could not emulate the success of natural science. Further, the methodological positions of PAT conform to none of the standard accounts of science. Rather, PAT contains elements of all three. Finally, this paper identifies some methodological gaps in PAT. Keywords: Positive Accounting Theory, Philosophy of Science, Methodological Controversies Acknowledgements I would like to thank two anonymous reviewers of the journal for their helpful comments. Earlier versions of this paper benefited from comments from Lee Parker of the University of South Australia, Keith...
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...Introduction This paper examines the development of positive accounting theory (PAT) and compares it with three standard accounts of science. There is some confusion about what PAT is. If the definition of accounting theory (i.e., accounting theory seeks to explain and predict accounting and auditing practice) given in Watts and Zimmerman’s 1986 book is taken to mean PAT, studies of accounting choices and auditing practices constitute PAT. At the same time, they also seek to explain the economics-based empirical literature in accounting and they describe, in addition to accounting choice studies, capital market-based accounting research. They point out that Ball and Brown (1968) initially popularized positive research in accounting, suggesting that PAT includes both capital market-based accounting research and research in accounting choices. This paper takes PAT to include both research programs. This usage is consistent with Watts and Zimmerman’s (1986) assertion that when they use the term “positive” to differentiate it from “prescriptive” theory. Positive Accounting Theory and Science by M. Humayun Kabir Senior Lecturer, Faculty of Business Auckland University of Technology, Auckland, New Zealand Abstract This paper examines the development of positive accounting theory (PAT) and compares it with three standard accounts of science: Popper (1959), Kuhn (1996), and Lakatos (1970). PAT has been one of the most influential accounting research programs...
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...Stock exchange (ISE) Syed Tauseef Raza Gilani Department of Management Sciences, The Islamia University of Bahawalpur, Pakistan Email: tosif399@gmail.com, Tel: +00923006327270 Abstract The characteristics of stock prices reflect the all available information in market. This study explored the weak form efficiency of Islamabad Stock Exchange (ISE). In this research paper, we have also revealed the behavior of prices traded in Islamabad Stock Exchange, and how it behaves in different unusual events. Stock markets are the major contributor to economy. To test the weak form efficiency of Islamabad Stock exchange, we have tested Efficient Market Hypothesis. EMH is method to measure the stock prices trends in the market. Efficient market hypothesis also helps for making the right investment decisions. From two of decades, EMH has obtained much great importance in the field of finance. So it has attracted many researchers to explore the anomalous behavior of efficient stock market. Efficient market hypothesis has three main categories: 1. Weak form 2. Semi-strong form 3. Strong form. We will focus only weak form of market efficiency in ISE. Focus of the study is to analyze the weak form of ISE-10 in the stock market. For this purpose we have used different statistical technique for analyzing the data that is collected from the official website of ISE. Data will be in the form of weekly ISE-10 share index. Time period of data is From January, 2013 to December, 2013. To render this...
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...A PROJECT REPORT ON “PERFORMANCE OF INITIAL PUBLIC OFFER" AT GURUKRUPA INVESTMENTS BARDOLI. SUBMITTED BY KRUNAL.B.PATEL 06 MBA 33 SUBMITTED TO MR.GOVIND DHINAIYA MBA PROGRAMME (YEAR 2006- 2008) SHRIMAD RAJCHANDRA INSTITUTE OF MANAGEMENT AND COMPUTER APPLICATION DECLARATION I, undersigned Mr.krunal .B. Patel, student of Shrimad Rajchandra Institute Of Management & Computer Application, Bardoli, affiliated to Veer Narmad South Gujarat University, Surat declare that report on “PERFORMANCE OF IPO” is my own work. The research was carried out by me as a part of summer training in the company for being evaluated for the MBA degree. Place: Date: __________ (Patel Krunal .B) (06 MBA 33) ACKNOWLEDGEMENT I as the student of management, feel proud on successfully completing the project on “PERFORMANCE OF IPO” at “GURUKRUPA INVESTMENT” of Bardoli. A project of this nature involves the support of many people. I believe that I would be lacking in my duty if I did not express my sincere gratitude to them. I am extremely thankful to Dr. Bankim Patel director, and Mr.Govind Dhinaiya, my project mentor for providing good guidance and other facilities during my training program. I m heartily thankful to Mr. Nitin Prajapati...
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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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...1.- Problem statement and motivation How do Financial Markets participants make decisions? How do these decisions affect the financial markets? With the financial markets in Asia being the largest in the world, such an interesting environment with participants displaying different levels of capitalism, financial market experience and knowledge, Asia is definitely a fertile ground for the study od behavioral finance. According to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways. Asians in general suffer from cognitive biases, more so than Westerners, often being viewed as ‘Gamblers. Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions .It calls for investigation into higher mental processes, memory, perception, problem solving and thinking .This paper looks at some of the anomalies (i.e., irregularities) that conventional financial theories have failed to explain. In addition, review underlying reasons and biases that cause some people to behave irrationally. 2.- Brief survey of the literature The following areas of research have been covered, from the mid 1980’s to the main focus of the article(special...
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...11/2/2011 Corporate Finance Efficient Market Hypothesis Reading: Chapter13, BMAM IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM 1 Relationship among Three Different Information Sets All information relevant to a stock Information set of publicly available information Information set of past prices 13-2 IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM 1 11/2/2011 The Different Types of Market Efficiency • Weak Form – Security prices reflect all information found in past prices and volume. • Semi-Strong Form – Security prices information. reflect all publicly available • Strong Form – Security prices reflect all information—public and private. 13-3 IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM Relationship among Three Different Information Sets Strong Form Efficiency Semi strong form efficiency Weak Form Efficiency 13-4 IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM 2 11/2/2011 Weak Form Market Efficiency • Security prices reflect all information found in past prices and volume. • If the weak form of market efficiency holds, then technical analysis is of no value. 13-5 IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM Why Technical Analysis Fails Stock Price Investor behavior tends to eliminate any profit opportunity associated with stock price patterns. Sell Sell Buy Buy If it were possible to make big money simply by finding “the pattern” in the stock price movements, everyone would do it and the profits would be...
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...Investigating the Market-Structure - Performance Relationship in the Commercial Banking Sector: Evidence from Jamaica Sherene A. Bailey1 Financial Stability Department Bank of Jamaica January 2007 Abstract This paper employs a two-stage estimation procedure to evaluate the impact of bank concentration on performance. In the first stage of the estimation process, a stochastic cost frontier is estimated for the dominant commercial banks in Jamaica over the period 1989 – 2005, using both translog and Cobb-Douglas cost functions. The translog cost frontier model was found to be a more appropriate fit for the data. As such, efficiency estimates from this cost frontier model served as endogenous inputs in the second stage of the estimation procedure, where a VAR framework was employed to investigate the relationship between efficiency, concentration, and performance in the industry. The findings from the paper suggest that, on average, dominant banks in the industry would only need to reduce costs by 7.0 per cent in order to operate as efficiently as possible. Results from the VAR framework reject the structure-market-performance hypothesis. Rather, improvements in efficiency contribute to increased profitability for the dominant banks. However, improvements in efficiency for these dominant banks may not be reflected in their pricing policies due to the absence of strong competition in the sector. As such, there is further scope for initiatives geared at lowering interest...
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