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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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