. The background of the study is about the relationship between efficient market hypotheses with capital market (stock exchange). In investment concept, efficient market can be describe as a strategic that investor can react quickly from the information gathered either to buy or to sell the security or stocks. In other word, efficient market hypothesis can be determine as the basics theory of the behavior of efficient market, in which they are the large number of the knowledgeable investors who react quickly to new information causing, security prices to adjust quickly and accurately. In addition, capital market is market in which long-term securities (with maturities greater than one year) such as stock and bonds are bought and sold. The purpose of this research is to determine which form of efficient market hypothesis that more concern with stock prices that fully reflect the information gathered in point of time. The dependent variable is efficient market hypothesis while the independent variables are capital market or stock exchanges. This hypothesis measured or tested with a time series model. The dependent variable is the Efficient Market Hypothesis (EMH) and the independent variable is prices of stock exchange. The method of analysis for this study is using multiple regressions. The paper uses day to week data, monthly data and yearly data it relies on its price of stock. Data use in this study is using the indices and stock prices of capital market from different country. The references of the data that these study use are from scholar journals and research papers. The nature of the data is secondary data. The period of the data is from the 2001 to 2010. The scope of study will be about the Efficient Market Hypothesis (EMH) and Istanbul Stock Exchange. Finally, the expected result from the study the relationship between Efficient Market Hypothesis with Capital Market and stock exchange is weak form of EMH.
LITERATURE REVIEW
Introduction to Efficient Market Hypothesis (EMH).
In generally, efficient market can be defined as one that which comes from security prices that will fully reflects to the all possible information. Related to the investors' concept, once the information gathered they will quickly react with the information to make a decision either to buy or to sell the stocks. The information will affect the current prices.
In addition, efficient market also tells that past information will reflect the current prices and also information about event that will be announced or not yet to be occurred not is effect with current market. Other than that, prediction about future information will affect the current prices. Which happen to investor when they actively forecast important event and react with those forecast information into estimates.
In active market, it efficient because many rational decision are made with highly competitive investor who will react quickly and objectively to new information. All investor are aiming to get highly profits.
Efficient Market Hypothesis (EMH) is the basics theory of the behavior of efficient market, in which they are the large number of the knowledgeable investors who react quickly to new information causing, security prices to adjust quickly and accurately.
Alternative effective market hypothesis.
Normally in early work related to the efficient capital market, they was based on the random walk hypothesis which mean it contended that changes in stock prices occurred randomly. The early academic work contended the extensive empirical analysis without much theory behind and after that the article by FAMA (1970) attempted to formulize the theory and organize the growing empirical evidence. In the article, FAMA divided the overall Efficient Market Hypothesis (EMH) and the empirical tests to the hypothesis into three sub hypothesis depending on the information which are:
Weak-Form Efficient Market Hypothesis
It was assume where the current stock prices fully reflect all the securities market information and it including the historical sequence of prices, rates of return, trading volume data and other market-generated information such as odd-transaction and block trades by exchanging the specialist. All this assumes is because the current market prices already reflect all past returns and any other security market information and because of that this hypothesis being implies that past of return and other historical market data should have no relationship with future rates of return.
Semi-Strong Efficient Market Hypothesis
In this securities price adjust rapidly to the release of all public information which means the current security prices fully reflect all public information. This hypothesis encompasses the weak-form hypothesis because all the market information was considered by the weak-form hypothesis.
Strong-Form Efficient Market Hypothesis
This hypothesis holds no information, public or private that allows investor to consistently earn abnormal returns. It states that stock prices immediately adjust to any information, even if it isn't available to every investor and this extreme form of the EMH has not received the universal support. One types of private information is the kind obtained by corporate insiders such as officers or director of a corporation.
Test and results of efficient market hypothesis.
Weak-form hypothesis
The first category involves statically test of independence between rate and return. In this test, there involve of two major to verify this independence:
Autocorrelation test of independence measure the significant of positive or negative correlation in returns over time.
A run test is occurs when two consecutive changes are the same, two or more consecutive positive or negative prices changes constitute one run. The price changes either (+) increase in price or (-) decrease in prices.
The second category is a comparison of risk-return results for trading rules that make investment decisions based on the past market information that relative to the results from a simple buy and hold policy.
Semi strong-form hypothesis
The evidence from test of the semi strong form is mixed. The hypothesis receives almost unanimous support from numerous event study including stock splits, IPO, world event and others. The only mixed result comes from exchange listing studies. This form is based on the predicting rates of return over all numerous events.
Strong-form hypothesis
In this test, it generated mixed results. The result from two unique groups of investors (corporate insiders and stock exchange specialist) did not support the hypothesis because these groups have monopolistic access and use it to derive above-average returns. The results for value line ranking have changed over time and currently tend toward support for EMH.
Scope of study.
The scope of study will be use in the institution is capital market of Istanbul. The reference by the scholar journal is using indices of Istanbul Stock Exchange (ISE) as the scope of data. The paper use monthly indices of the ISE from year 1986 to 2006. The nature of the study is secondary data.
2.0 REVIEW OF PAST STUDIES
2.1 Studies in Efficient Market Hypothesis (EMH).
According to Mehmet Aga (2008) The Efficient Market Hypothesis (EMH) is concerned with whether stock prices fully reflect all the information available at that point in time. There are three basic definitions of market efficiency. These three definitions are primarily concerned with determining the degree to which markets are efficient. Firstly is Weak Form tests of the EMH model focus on the information subset of historical price or return consequences. Secondly, the semi-strong efficiency hypothesis asserts that all public information is reflected in the stock's prices. Lastly is the strong-form efficiency hypothesis asserts that all information, both public and private, is reflected in the current price of the stock.
Other studies, conducted by Cheung Kwok LAW stated that the purposed for investor in EMH would imply that actively managed portfolio might not do better than buy-and -hold portfolios in terms of long-term performance. The transaction would be worse when the transaction costs are taken into account. In the "weak" form test, it is using historical prices information. "Semi-strong" form test, the focus is on whether publicity available information and the last form is "strong" form test is based on the question of investor have monopolistic access information relevant to determination of stock prices.
Fama (1956) also agreed that EMH has been classified into three categories that are weak form, semi-strong form, and strong form. In the weak form, he tells that the stock returns are serially uncorrelated and have a constant mean. Means that current prices of the stocks fully reflect all information that contains historical prices. In semi strong efficient if the stock prices instantaneously reflect any new publicity available information and for strong form is prices reflect all types of information whether available publicity or privately.
From journal by C Miambo and N Biekpe, it tells us that Fama (1956, 1970) stated the EMH has become the central part of finance theory. The roots of research done around this concept has evidence that interest of EMH has around in the both the investment and academic circles.
In the journal wrote by kurt Dew (2001), he found two result that the EMH related to Capital Asset Pricing Model (CAPM). First he comes out with the result that CAPM applies with securities markets are efficient and cannot be rejected. The second result tells us that the simple buying and holding the portfolio produced a low ratio of return to risk. At last, he come out with a conclusion that an active trading rule generates very high return and this evidence of weak form inefficiency.
According to Nik Maheran Nik Muhammad and Nik Muhd Naziman Abd. Rahman (2010), they tell that EMH popular known as The Random Walk Theory. The proposition that current stock prices fully reflects available information about the value of the firm and there is no way to earn excess profits by using that information gathered.
The evidence of equity market anomalies contradicts the EMH at least in its weak form. In other word, Hassan Aly, Seyed Mehdian, and Mark J. Perry (2004) tells the stock market anomalies may result from an inefficient flow of information in financial markets, which is a violation of an underlying assumption of the EMH.
According to Allan Timmermann, Clive W.J. Granger in his journal, Cootner, (1964) stated that, soon after the empirical evidence appeared, the EMH was pro-posed based on the overpowering logic that if returns were forecastable, many investors would use them to generate unlimited profits. The behavior of market participants induce returns that obey the EMH, otherwise there would exist a 'money-machine' producing unlimited wealth, which cannot occur in a stable economy.
Other than that, in the same journal, Fama (1970,1991) have focused on testing informational efficiency. Fama (1970) concludes that the empirical evidence islargely supportive of weak form and semi-strong form efficiency, while Fama (1991) reports stronger evidence of predictability in returns based both on lagged values of returns and publicly available information.
From Kian-Ping Lim, Venus Khim-Sen Liew and Hock-Tsen Wong (2000) journal, Saw and Tan (1989) found that the Malaysian stock market is inefficient in the weak form when weakly data were used, but pockets of market efficiency existed when monthly data were used.
For instance, Ammermann and Patterson (2003) found that the detected linear serial dependencies in their studies are driven, at least in part, by the price limits that were imposed on the market, which cause the instances of significant autocorrelation to be heavily clustered. This is not surprising as Ryoo and Smith (2002) also found that effective price limits prevent market prices from following a random walk and as a result, induce autocorrelation.
2.2 Study in Efficient Market Hypothesis (EMH) relationship with Capital Market.
From the research that wrote by Mahmet Aga and Berna Kocaman (2008), the general conclusion from numerous studies in develops countries, beginning with information gathered from Fama (1965) is the weak-form of market efficiency holds and that no exploitable patterns in the past trading records exist. Other than that, Lo and McKinlay (1988) observed some autocorrelation of share prices, indicating that the prices do not follow a random walk. Dickson and Muragu (1994) found evidence consistent with the EMH in their study of the Nairobi Stock Exchange, while Barnes'(1986) study of Kuala Lumpur stock exchange provided only limited support of the weak form of the EMH. Zychowicz et al. (1995) concluded that on the Istanbul stock exchange, daily and weekly returns diverge from a random walk, while monthly returns are consistent with weak form market efficiency.
According to Cheung-Kwok LAW said that the establishment of the EMH would imply that actively managed investment portfolios might not do better than naive buy-and-hold portfolios in terms of long-term performance. This study purports to make a comprehensive investigation of the "weak" form of the EMH (WEMH).
The weak form is the notion that the market is efficient in past price and volume information and does not predict stock return and price movements' accurately using historical information. This result comes from Jeffrey E.Jarrett (2008). It also stated in past research that was wrote by Rothlein and Jarret (2002); Jarret and Kyper (2005).
According Enrico Onali and John Goddard on on their journal, Fama (1970) finds the weak-form Efficient Market Hypothesis (EMH) posits that current security prices impound all of the information that can be derived from their past value.
According to C Miambo and N Biekte(2007) The research studies the weak form efficiency of 10 African stock markets using the serial correlation and runs tests.
Based on the same author above, Kullimann (2002), Lo and MacKinlay (1988), Poterba and Summers (1988), find out that an implication of the weak-form Efficient Market Hypothesis (EMH) is that logarithmic returns are Gaussian and independent and identically distributed, and log prices follow random walk. Many empirical studies based on US data have rejected the hypothesis of weak-form efficiency although some recent evidence is more supportive by Toth and Kertesz (2006).
Strong evidence of profitability of using technical analysis, primarily, the moving averages, in forecasting the market. According to Zhu and Zhou (2009), demonstrate that technical analysis can be a valuable thing learning tool about the uncertainty of market dynamics.
SUMMARY OF LITERATURE REVIEW
The Efficient Market Hypothesis (EMH) is concerned with stock prices fully reflect all the information available at that point in time. There are three types of EMH which are weak form of EMH, semi-strong from of EMH, and strong form of EMH. The journal studied more focus on EMH and capital market (stock exchange). From references studied has result on weak form of EMH and indices of the stock exchange, means that past data on stock process are not use in predicting future price or indices.
