The efficient market hypothesis is seen as the turning point of the modern finance (Fama, 1965). Market efficiency is known as the speed and accuracy where the current market prices reflect the investor expectations. When the market is efficient, all the available information is fully and automatically reflected in the price, gaining profit by using this information is seen impossible. Efficient market hypothesis predicts that market price should incorporate all available information at any point in time.
Para 2 : Issues EMH dngn FB
ambik significant of the study several related artickel
This paper will discuss the definition and concept of efficient market hypothesis and behavior finance in general. I will be look into market issues for countries of Malaysia, USA and Africa. I would then like to highlight the issues on this area for future research.
EMH
Definition and Concept
The Efficient Market Hypothesis (EMH) is an investment theory that stated it is impossible to compete with the market when stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks are always trade at their fair value on stock exchanges. Investors will face difficulties or even impossible in either purchase undervalued stocks or sell stocks for inflated prices. The possible way for investors to obtain higher returns is by purchasing riskier investment and they have to outperform the overall market through expert stock selection or market timing.
Forms of EMH
There are three forms of Efficient Market Hypothesis where the key to all the three forms remain that is intense competition among investors to gain profit from any new information. There are three versions of EMH, namely the Weak From EMH, Semi Strong EMH and Strong EMH.
The weak form EMH is based on past history of prices where the past information is used to analyze for profit return. This method is called technical analysis. The value retrieved from technical analysis is strong and consistent. On the other hand in semi strong form, the current stock price has fully taken into consideration all publicly information that is available. However, the information in the semi strong form is available to all the investors; one is expected not to gain much profit with such information. But this form is stronger than the weak form. Whereas strong form of EMH is taking the current price fully incorporates all existing inside information, both public and private.
When the information set us limited to past price and return, the market is said to be weak-from efficient and there is correlation between current return on security and the return over a previous period. However the return is purely unpredictable from the past information. In semi strong Efficient Market Hypothesis, all publicly available information is reflected in the stock market. Investment Managers claim that mutual fund managers are skilled in analyzing publicly available information but empirical evidence do not support. Market Efficiency and security prices reflect all available information whereas new information is expected to be converted into price changes. Efficient Capital Market participants will react immediately and in an unbiased manner.
Important of EMH
There are common misconceptions of EMH. EMH claims that investors cannot outperform the market the market but there are successful analyst that do so EMH is seen to be incorrect. EMH claims that one should not be expected to outperform the market predictably or consistently. EMH said that financial analysis is pointless and investors are wasting time if do research security price. But Financial Analyst is still needed in the market. Again EMH is found to be incorrect. EMH sees new information is always fully reflected in market places and yet prices fluctuates every day, every hour and minutes. EMH must be incorrect. EMH presumes that all investors are technical know how but in reality it is otherwise. EMH is incorrect
Criticism towards Efficient Market Hypothesis
There are several opinions against the EMH. First is the over reaction and under reaction of investors. EMH claims that the investor react quickly and in an unbiased manner to new information but it was contradicted to De Bont and Thaler. They said that stock with long term past return tend to have a higher future returns and vice versa and empirical observation shows that stock prices respond to earning about a year after the announcement. Secondly, the value versus growth where value strategy is able to outperform the market consistently. Finally is the small firm effects where average return on small stocks were too large to be justified by the CAPM while the average returns on large stocks were too low.
There are also implications of Market Efficient for Investors where the EM, investors have little to gain from active management strategies; should follow passive investment strategy and no attempts to beat the market but to optimize returns through diversification and asset allocation.
Behavioral Finance
Definition and Concept
The behavioural finance is a theory of finance that intend to explain the decisions of investors as rational actors. The rational actors are seeking for their self-interest, given the sometimes inefficient nature of the market.
The market inefficiencies can be explained by tracing the Theory of Moral Sentiments, by Adam Smiths's. According to Adam, there is two observations, (i) that the investors (and people in general) make decisions on imprecise impressions and beliefs rather than rational analysis, and (ii) the way a question or problem is framed to an investor will influence the decision he/she ultimately makes. From these two observations, what can be concluded that markets are sometimes inefficient because people are not mathematical equation? Behavioural finance stands in contrast to the efficient markets theory.
Issues in Behavioral Finance
This study, which is essentially a literature review, intends to explain the behaviour of stock prices with respect to information. It considers efficiency in relation to block transactions, new issues, stock splits and mutual fund performance with a consideration of empirical models that have found extensive use in the EMH research. Also, the issue of information adequacy and redundancies of annual financial reports (AFRs) in Nigeria is also discussed. Most of the evidence obtained from scholarly works on the EMH is consistent with the strong form but cases where market anomalies exist to depart from EMH lend credence to the impact of imperfections of market conditions. As a result, we conclude with a case for Behavioural finance which studies how cognitive or emotional biases create anomalies in market prices and returns.
A number of scientific research focusing on the stock market has not only developed new theories on capital markets but refined existing ones which are considered sophisticated and efficient in the interpretation of relevant information. The main focus of this paper is to review some past financial studies on market efficiency especially informational efficiency with a view to bringing out the behavioural paradigin that reflects the Efficient Market Hypothesis reliance on the activities of arbitrageurs and experts who create demand and supply patterns to sustain the market in equilibrium. It is also indicated that the value of any information structure should be considered net of costs, so that any claim to abnormal returns as a result of monopoly of relevant information may not be significant relative to the cost of obtaining the information which is applicable to both portfolio managers and individual investors.
In this study, we considered the impact of accounting information on stock prices; block trades; new issues; stock splits and mutual fund performance. Most of the evidence are consistent with the weak and semistrong forms of market efficiency but inconsistent with the strong form. In certain
situations, individuals with inside information appear to be able to earn abnormal returns. This fact
may depict an informational inefficiency rather than general which lend credence to the theory of
arbitrage capital markets inefficiency. Moreover, block traders can earn abnormal returns when they
trade at the block price as in purchases of new equity issues. Additional research could be performed
on the impact of capital structure decisions of firms on stock prices. Ariyo & Soyode study of 1985
though inciting, was not clear in this regard because it focused on information adequacy and
redundancies. This is a challenge the researcher will assume in a subsequent endeavor.
Also, it is sometimes cited that market movements sometimes seem inexplicable in terms of the
conventional theories of stock price determination, This perception seems to give credence to the
impact of individual biases or psychology on market conditions. A growing field of research, referred
to as Behavioural Finance, studies how cognitive or emotional biases, which are individual or
collective, create anomalies in market prices and returns and other deviations from the EMH.
Behavioural models typically integrate insights from psychology with neo-classical economic theory.
However, EMH proponents opine that any observed anomalies will eventually be priced out of the
market or explained by appeal to microstructure. They further indicate the necessity to distinguish
between individual biases and social biases; the former can be averaged out by the market, while the
other create feedback loops that drive the market further away from the equilibrium of the 'fair price'
Summary of Researches
Weak form of EMH
This section will discuss the research finding from Malaysia ( ) and Africa ( ) .
The first research which was done by >>>>> was the weak form EMH that generally holds in KLSE Malaysia and the presence of linear and non-linear dependencies. These dependencies show up at random intervals for a brief of time but then disappear again before they can be exploited by investors.
Efficient Market Hypothesis is a fair game with one important note that the security prices will change accordingly with new information which was not considered during forming current market prices. The paper focus on the weak form EMH where the only determinant of the security prices is the based on historical prices. The price movement in a weak form occur randomly and successive price changes are independent of one another, i.e. random walk theory. Past price analysis has no meaning since the patterns observed in the past occurred purely by chance.
The weak form Efficient Market Hypothesis has been studied since many years in KLSE. Malaysian stock market is inefficient in the weak form when weekly data were used but efficiency exist when monthly data were used. Test done by Von Nehmann's suggested that information that is based on historical prices is fully reflected in current price within a week but may not be fully impounded in current price within a day which conclude that Second Board of KLSE is weak form efficient with respect to weekly data. But when weekly data were used the efficiency of the Malaysian stock market has improved from a weak form inefficient market in mid 1980s to weak form efficient by late 80s and early 90s. Empirical evidence from various statistical test found out that the low trading volumes in most stocks and the possible price manipulations by those investors who own majority of the stocks might help to explain the findings of the runs test.
The reason for departure from random walk is due to the presence of non-linear dependencies in the underlying data generating process which is now widely accepted as a salient feature of financial returns in general and stock returns series in particular. Non linearity has strong implication on the weak form EMH for its implies the potential of predictability in financial returns. Lim et. al (2003b.d) and Lim and Tan (2003) provided convincing evidence that non-linearity plays a significant role in the underlying dynamics of the Malaysian stock market. Ko and Lee (1991:224) If the RWH hypothesis holds, the weak form of efficient market but not vice versa. Thus evidence supporting the random walk model is the evidence of market efficiency. But violation of the random walk model need not be evidence of market inefficiency in the weak form. Kok and Lee (1994) and Kok and Goh (1995) argued that though daily price series are found to be serially correlated, the magnitude of their correlations is not large enough for any mechanical trading rules to be devised for profitable investment timing. In connection to the existence of linear/non-linear dependency structures to the concept of information arrival and market reactions to that information will prove to enlightening. It is said that if the market is efficient and the new information is useful then it shall be reflected quickly and unbiasedly into market prices. There is a rationalization the co-existence of weak-form EMH and behavioural finance in KLSE when the statistical properties of random walk, linear and non-linear dependencies, which is also co-exist in the time domain, are interpreted in the framework of information arrival and market reactions to that information.
The second research was done by >>>>>>>>>>>> with regard the weak form in the African Stock Market. Johannesburg Stock Exchange is found to be weak form efficient but using weekly data it is not weak form efficient. Studies that have used data on individual stocks used either monthly or weekly data rather than daily data due to non availability of computerised databases. Another argument for using data measured over longer time intervals in the problem of thin trading. Increasing the time interval is argued to reduce the potential biases associated with thin-trading by increasing the probability of having at least one trade in the interval. (Dickinson and Muragu, 1994). This paper studies the weak form efficiency of ten African stock markets using the serial correlation and runs tests
African stock market emerged in the late 1980s and early 1990s and the latest in 2003. African stock exchanges are also the smallest in the world in terms of both number of listed stocks and market capitalisation. The majority of stock markets in Africa trade daily from Monday to Friday. The portfolio inflows to Africa have been disappointing due to unfavourable scenario is that acquisition of shares by foreigners is limited on some African stock markets. The Market Regulator were established on the back of poor regulatory and legislative frameworks. African stock markets are also known to be illiquid and characterised by thin trading (Mlambo and Biekpe, 2005) in comparison to stock markets in other regions. The delay market is perceived by African governments to be an indication of integration into the global economy. It is considered to be a sign of international legitimacy and a measure of a country's modernisation and commitment to private sector-led development (Moss, 2004). The data used in this study are daily closing stock prices and volume traded for individual stocks. The markets in this study exhibit serious thin-trading for the periods under investigation.
Positive serial correlation is usually considered to be a predictability phenomenon of the short run, while negative serial correlation is mostly a long run predictability phenomenon. The positive serial correlation on African Stock markets might also be a result of institutions imitating spreading their trades over several days to lessen the impact of trades in large volumes on the market (Asal, 2000) The weak market form efficiency if the NSX can probably be explained by the market's positive correlation with the JSE due to the significant number of stocks that are dual-listed on both markets. The efficiency of the NSX can thus be said to be spill over from, or a reflection of, the weak-form efficiency of the JSE.
The weak form efficiency of the NSX was attributed to its correlation with the JSE. Kenya and Zimbabwe were also concluded as generally weak form efficient, since a significant number of stocks conformed to the random walk. The stock prices on the Mauritius market tend to deviate from the random walk hypothesis. The same conclusion was made for Ghana.
The run test used here only tests for the existence of a linear relationship which makes it inadequate as a testing method on African stock markets where the return generating processes are assumed to be nonlinear. The use of linear models would thus lead to wrong inferences being drawn. Thus further research is required to test the random walk hypo
Section 3
Kim et al., (2009), study return predictability of the daily and weekly Dow-Jones Industrial Average indices from 1900 to 2009. The degree of return predictability is estimated using two autocorrelation test (variance ratio and portmanteau) statistics, implementing moving sub-sample windows of different lengths. The found strong evidence that return predictability is driven by changing market conditions. In particular, during market crashes (1929 and 1987), no return predictability has been observed, but an extreme degree of uncertainty is associated with return predictability. During fundamental economic or political crises, stock returns have been highly predictable with a moderate degree of uncertainty. During economic bubbles, return predictability and its uncertainty have been smaller than normal times. Our results are in strong support of the adaptive markets hypothesis, which claim that changing market conditions drive the key market features such as the return predictability.
We examine the degree of return predictability of the U.S. stock market using the century-long Dow-Jones industrial index. As measures of return predictability, we use 7 Our finding complements recent study by Neely et al. (2009) who report the evidence in favour of the adaptive markets hypothesis for the foreign exchange market in the context of profitability of technical trading rules.
the statistics from the automatic variance ratio and automatic portmanteau tests. To detect possible non-linear dependence in stock return, the generalized spectral test has been implemented. We obtain monthly time-varying measures of return predictability by applying these tests to moving sub-sample windows over monthly grids. A regression analysis is conducted to determine how these measures of return predictability are related to changing market conditions and economic fundamentals.
We find evidence for cyclical evolution of return predictability, in which changing market conditions are important factors for the degree of return predictability. It is found that, during market crashes, no return predictability is evident but its uncertainty has been exceptionally high. However, during economic and political crises, a high degree of return predictability is observed, but only with moderate degree of uncertainty. During bubble times, the return predictability and its uncertainty are found to be lower than normal times. Contrary to the general findings of past empirical and survey studies, we have found evidence the U.S. market has
become more efficient after 1980. This is convincing given that the U.S. market has implemented a various measures of market innovations in the 1960's and 19070's, and that US macroeconomic fundamentals have become much more stable since 1980. In addition, there have been fewer occurrences of economic and political crises after 1980 than before. Our finding is a manifestation of the adaptive markets hypothesis, which argues that dynamic market conditions govern the degree of stock market efficiency
Section 4
Hadi noted that the objective of accounting numbers is to provide the financial data about the performance of certain enterprise in order to help the managers, investors, shareholders and government authorities in making their decisions. On the other hand, the purpose of accounting research is to evaluate the usefulness of accounting data to investors and other users. Furthermore, the purpose of capital market research is to examine the association between accounting numbers and security return and to test whether or not accounting data carry any information content to security market, and if so it should be impounded in the security price, the results show the security market reacted with mixed signal on releasing profitability, liquidly, and solvency information.
This paper identified EMH and provided some detail on the types of EMH, as well as identifying the empirical research that tested weak, semi-strong and strong forms of market efficiency. Accounting market based research more often assumes that market is efficient in semi-strong form, and the reason for this is that financial reports are considered public information once they are released to the market. In this paper empirical evidence has been provided from Jordanian market, and it shows the security market reacted with mixed signal on releasing profitability, liquidly, and solvency information. The selection of the relevant pricing model is very critical in market-based research. Brown and Warner (1980) investigate how different methods performed when some abnormal performance was present. They conclude that " There is no evidence that more complicated methodology conveys any benefit. "(Brown and Warner, 1980). Also, they argue that using more complicated models will make the researcher worse off. Furthermore, the use of the market model or even simple models such as mean adjusted return is better than more complicated models like control portfolio.
In Kuwait, a few research has been investigated in market efficiency in strong form, I suggest for future research test for insider information.
