IMCM SOLUATION

8/8/2019 IMCM SOLUATION

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(London School of Commerce)

M.B.A (II) (FINANCE)

ASSINGMENT:

Investment management And Capital Markets

CRITICAL REVIEW

THE EMPIRICAL RESEARCH ON MARKET

EFFICIENCY AND

CONCEPT OF THE EFFICIENT

MARKET HYPOTHESIS

NAME: NIKUNJ PATEL

STUDENT ID: 0661SWSW1109

TUTOR: VIJAY SHENAI and MAKAILLA McCONNEL


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INTRODUCTION

THEORY OF EUGENA FAMA:

The efficient market hypothesis developed by Eugena Fama in the year

1906s at university of Chicago booth school of business.EMH says any

given time; asset all prices reproduce all accessible information. In same

manner suggestion is one of the most divisive ideas in all of science

research. At all times under the efficient market hypothesis, we buying

and selling securities. If existing market and efficient, that means price

always replicate to all information. One of the Management information

technology finance professor Andrew LO writes said about EMH it is

disarmingly simple to state, has far reaching cost for educational

pursuits and business practice and yet it is amazingly flexible to

experimental proof or refusal.In financial nature no any limit for

information. It may be predict of investor correct or wrong. The EMH

theory trying to beat the marketplace and becomes game of chance not

ability. According to EMH, stock always trade at their fair value on stock

exchange. Its making for investors for trading to stock for inflated

price.EMH start in 1965 with Nobel price awarders Paul Samuelson

articles. evidence that right likely price change aimlessly other finance

professor Eugene Fama with his 1970 paper Efficient capital market

this person coined the term EMH and made it operational with the initial

description that in efficient markets, and price fully reflect all available

information. In this matter, no information or no analysis can beexpected to result in outperformance of an suitable standard. Because of

the large accessibility of public information. It is nearly impossible for a

personality to hit the market constantly.


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According to FAMA, he introduced in market efficiency place three type

of hypothesis, weak form efficiency, semi strong form efficiency and

strong form efficiency.

Weak Form Efficiency: this theory weak from efficiency indicated future

price cannot be predicted by analyzing prices from the past. The

historical data cant using by investment earned by long run excess. Also

technical investigation cannot adjustable to risen excess returns. In

some way fundamental study will provide excess returns. When EMH do

predict that all price movement is random, many studies done on market

propensity. For the stock market to tender over time periods of week or

longer.

Semi strong Form Efficiency: In this efficiency share price increasingly

very rapidly and new information spread quickly. Semi strong efficiency

adjustable to technical study and fundamental study will able to

consistently to make excess returns. To test of semi strong efficiency

reliable upward and downward adjustments and recently changes find

out and look after it. This efficiency would advice to investors had

interpreted the information in a biased fashion and therefore in an

incompetent manner.

Strong Form Efficiency: In public and private cant earn excess returns

when share prices reflect all information. Strong form efficiency is

impossible when private firm transfer in to public sector. In the term of

strong form efficiency, a market requirement to survive where investors

cannot constantly earn excess returns over a long period of time.


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THEORY OF BURTON MALKIEL: Professor, Burton Malkiel of

Princeton, suggested that throwing darts at the newspaper stock listings

is as good a way as any to pick stocks and is likely to hit most

processional investment managers. He advice in the later part of his

work how maintain on trying to hit the market might challenge to do so,

but he indicates that they are doubtful to be successful. Andrew Los

volumes bring together some of the most important contributions,

counting a paper called simply Noise by the late Fischer black. It says.

Noise in the sense of a large number of small events makes trading in

financial markets probable. Noise cause markets to be somewhat

inefficient, but often prevents us from taking advantage of inefficiency. Also writers Burton Malkiel latest edition of his book and add new

chapter The Assault on the Random Walk Theory: first he done the

market expectable than he writesi Have reviewed all the recent

research proclaiming the demise of the efficient market theory and

purporting to show that market price are, in fact predictable. My

conclusion is that such obituaries are greatly exaggerated and the extent

to which the stock market is usefully predictable has been vastly

overstated

Pricing irregularities and predictable patterns in stock returns may well

exist. Also market evaluation will be corrected. Increasing cleverness of

his databases and empirical research. He represented departures from

efficiency and further patterns in the development of stock returns.


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THEORY OF BERTUS, JAHERA AND YOST:

According to Mark Bertus, John S. Jahera,Tr;Keven Yost. Issue the one

of the article like The relation between bank regulation and economic

performance a cross country analysis. And published banks and banks

system in 2007 volume 2 issues 3 at Auburn University, USA. .Articles

purpose of understanding Bath, Caprio and Levine BCL (2006) plan a

questionnaire with 262 questions and distributed to central banking

authorities of 153 countries. This Articles presented by all these

researcher its says Country GDP ,Annual GDP ,Growth rate, inflation

rate for 2000-2004.they also collected data the information related

corruption and democracy from La Portal, Lopez-deSilages, Shelter

and Vishnu (1999).BCL represented the relationship of these factors

with financial sectors of the country.

According to Bertus, Jahera and Yost, Global financial markets are a

fundamentals ingredient in the production and maintenance of the

worlds economic activity. These three author said against banking

system is the very important factors of financial market. And it is covered

recognize that a well structured banking system, find out by its

managerial practice, risk taking, and governance, promotes greater

financial presentation and economic strength. And also they present with

argue to corruption, democracy, and legal origin. For example create

heterogeneous regulatory environments that implicated the performance

of across the world efficient policies. The studied of the empirically

evaluate the association between system characteristics and its level

income and growth.

This Article shown an over the past two decades most of all financial

crisis and which leaves the negative effects on economic around the


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world. Writers argue that the main cause of these can be unsound

banking practices, such as shifting toward non-traditional business

revenue or risen the risk profile of loans.

Bertus,Jahera and Yost have specified that Bath,Caprio and

Levine(BCL) find a positive relation between bank development and the

strength of a countries capital regulatory policy. And other research done

by (santos,2001;Koehn and Santomero,1980;Kim and Santomero

,1988;Besanko and Kanatas ,1996;and Blum 1999)advice that more

stringent capital needed may not reduce the risk taking behaviour of

banks. So According to author BCL reports mixed proofed on the

relation between capital regulation and bank stability. In addition they

find managerial oversight is positively related to bank development, even

controlling for country specific description.

SUGGESTIONS FOR IMPROVEMENTS:

Bertus, Jahera and Yost have carried out good research to find out

relationship between bank rule and economic presentation. They have

collected qualitative source of information like research of BCL and other

writers and also from Basel committee some banking authorities from all

over the world. They also demonstrate their research very well with

tables and numeric information.

The weak side of this research is authors have used as much as

secondary data collected from past research done by other on same

related topic. Other author have done in research method and they

provided by Basel committee telling capital authoritarian. And

managerial oversight but they also admit that there is no direct proof on


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how rigid guiding principle and policy for domestic banking system

involve the economic presentation of a country.

For suggestions of this topic the research paper author would collect

data by surveys regarding subjects. They can also used internet to

collect more up dated information, interview of the different financial

authority would gives more relevant and qualitative information.

DEPENDABILITY AND VALIDITY OF THE TOPIC:

According to Bertus, Jahera and Yost finally proved that well execution

financial system encourage the financial growth within countries and

have effectively found the target of research. They research relationship

between bank regulation and economic performance and cross country

analysis. From the empirical result findings can be referred to as reliable

and can be reproduced under the similar methodology. As on the basis

of concussion and implication of paper it can be said that result in the

articles is dependable and applicable because it is free from influence in

the language in the paper.

EMPIRICAL RESULT:

Theory of Bertus, John and Yost has empirically examined the relation

between economic presentation and authoritarian policies. While

controlling for fiscal and political situation within a country. The result of

this theory reliable with the concept that improved information

confession forces banks to operate more efficiently. This is a benefit for

most advantageous allocation of resources. End of the result they


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identify that possible endogeneity fault might have exist. Because higher

level of income may have more wealth at risk. And therefore demand

higher levels of information. They identify between income and

regulatory variables rather than causation.

The Evidence on market Efficiency:

Time Series properties of price Changes: In the financial markets

investors have to find put price charts and price patterns as tools for

expecting to price movement in the future. In first studies of market

efficiency depends upon relationship between price changes over time.

Some testing was focused on the random walk theory of price activities.

As a time series of studies divided in two parts like on short term price

behaviour and research that long term price movements. Short run

indicated by serial correlation, filter rules, runs tests.

Market inefficiencies and Money Manager Performance: the

evidence on market is conflicting. And in stock prices in turn in the long

term and returns are higher in January and evidence of market anomaly.

Small market covered firms with low price to book and price to earnings

ratio same like hit the market. And also evidence of money managers

liable to develop these findings to hit the market. With explanations in

hypothetical studies that the transactions cost and implementation

trouble with converting these inefficiencies into portfolios overwhelmsthe surplus returns. According to Pradhuman (2000) this phenomenon

by nothing that little capture stock have underperformed large capture

stock in approximately one out of every four years in the last 50 years.

Bernstein (1998) notes that while value investing may earn surplus


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returns over long periods. Development investing has outperformed

value investing over many five year periods during the last three

decades.

Evidence on Insiders and Investment Professionals: many insiders,

analysts and portfolio managers must possess benefit investors in the

market and capable to change this advantage in to surplus returns. The

SEC indentified for from trading in advance insider to be office or

director of the firm or a major stockholder. Insiders are banned for the

trading for information of the company and when needed for the SEC

when they buy or sell stock in the company.


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CONCLUSION

It is widely accepted that a well performance financial system promotes

financial development within a country. Banks, in particular help case the

allocation of capital. Reduce costs associated with information

asymmetry. And enforce internal oversight. By reducing these barriers,

banks play a significant role in promoting financial development.


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REFERENCE

Andrew Lo, Market Efficiency: stock Market Behaviour in Theory and

practice, two articles including Eugene famas seminal 1970 review, Paul

Samuelsons 1965 articles and Fischer Blacks 1986 articles.

Andrew Lo and Craig Mackinlay, A Non-Random Walk Down Wall

Street, Burton Malkiel A Random Walk Down Wall street, a long time

beatseller,First Published in 1973 and now in preparation for its seventh

edition.

Authors@Google Burton Malkiel

wn.com/Authors@Google_Burton_Malkiel

Barth J.Caprio, G lavine, and R.2001.Banking system around the globe:

Do regulation and ownership affect performance and stability? In Miskin

F.S (Ed0prudential supervision: what works and what doesnt 31-96university of Chicago press. Chicago.

Bank supervision and corporate finance Beck, T Demirgic-Kunt,

A.LevineR.2003.The World Bank research department paper series

3042.

Blum J.1999.Do bank capital adequacy requirements reduce risks?

Journal of Banking and Finance 23,755-771.

Chicago GSB Magazine: Winter 2007

www.chicagobooth.edu/magazine/vol29/issue01/facultydigest3.aspx


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Coase.R.2000.The nature of the firm economica4.386-405.

Caprio, G, Levine R, 2002.Corporate Governance Bank: concepts and

international observation. In Litan R.E.Pomerleano M.Sundarajan, V,

Financial Sector Governance the Roles of Private and public sectors 17-

50 brooking institution press, Washington, D.C.

Eugene Francis genefama American economist, first introduced

portfolio theory

en.wikipedia.org/wiki/Eugene_fama

Eugene famas (1970) survey raises questions about capital markets

www.frbsf.org/publications/economic/review/1990/90-2_29-40.pdf

Random Walk Theory en.wikipedia.org/wiki/Random_walk_hypothesis

Book Review:The Elements of investing By Burton G.Malkiel &Charles

D.Ellis

http://www.dailymarkets.com/stock/2010/03/29/book-review-the-

elements-of-investing-by-burton-g-malkiel-charles-d-ellis/

Social Research Network, Which Features Many Important papers in

investment, Eugene Fama s Market Efficiency, Long term Returns and

Behavioural financeweb.mit.edu/krugman/www-Paul krugmans website

www.ssrn.com

What is Market Efficiency? The EMH suggest to stock price fully reflect

all available information in the market .is this possible?

www.investopedia.com

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