Efficient

Market
Presented by:
Shobha Gandhi|1820982576
Shobhita Jain|1820982577
Hypothesis
Snehildeep Kaur|1820982581
Surbhi Mehta|1820982586
Shubham Thakral|1820981012
 EFFICIENT MARKET THEORY
● You cannot beat the market.
● Share prices reflects the information available.
● Every investor has access to same information.
 Example

Greedy bill and bob

 TECHNICAL ANALYSIS
● Physiological behaviour of human beings.
● Example of japanese, Homma, inventor of technical analysis
● Now known as candlestick technique
● Price and volume
● Past analysis, with the help of charts
● Understanding the supply and demand of a particular share, we predict
its future value
● Short term
● Example of technical analysis
Forms of Market Efficiency
 ➔ A market is said to be weak-form
efficient if current security prices
completely incorporate the
information contained in past prices.

Weak-form Efficient ➔ The set of information includes the

historical sequence of price, rates of

Market Hypothesis return, trading volume data, and

other market-generated information,
such as odd-lot transactions, block
trades etc.
Test: Weak Form Efficient Market Hypothesis
● Serial correlation test:- It is a relationship of variable with itself over a time
period. It is a linear relationship between current period return and
previous period return.

● Run test:- Measures the randomness of data; it is a non- parametric test

where we compare the expected runs with the observed runs, to see if
they are statistically different.

● Filter rule test:- It is all about the filter rule, i.e. it is a trading technique ; a
buy and hold strategy. In this, investors find out and filter value for a
security.
If the price of the security exceeds the filter value that has been set for it
then they will trade, invest or sell it.
 ➔ A market is said to be semistrong-
form efficient if current prices
incorporate all publicly available
information. That is, current prices
fully reflect all public information plus
past price information.

Semi strong form ➔ Public information includes

information, such as earnings and

EMH dividend announcements, price to-

earnings (P/E) ratios, book value-
market value (BV/MV), stock splits,
news about the economy, and political
news.
Test: Semi-Strong Form Efficient Market Hypothesis
● Event study:-
1. It tells us how fast stock prices adjust to specific significant economic
events.
2. Events can be situations or announcements.
3. It is an analysis of whether there was a statistically significant reaction in
financial market.
 ➔ At the extreme, a market is strong-
form efficient if current prices reflect
all information - public and private,
including inside information.

Strong-form EMH ➔ Inside information is information

about a firm which is available only to
“insiders” including corporate
executives and major shareholders.
Test: Strong form Efficient Market Hypothesis
● Portfolio study:-
1. Find out the characteristics and make portfolio accordingly.
2. Information should be gathered regarding the return of each firm in the
portfolio.
3. Calculate excess return by
excess return= return from a portfolio in particular time period- expected
return on the basis of market return.
4. If the excess return are different the the market is not semi- strongly
efficient.
Stock Market Anomalies
Fundamental Anomalies Announcement Based Technical Anomalies

● Value Strategy ● Earning - ● Momentum

● Book to Market Surprise Effect Effect
● High Dividend ● Information ● Moving averages
Yield releasing ● Trading Range
● Low P/E ratio hypothesis Break
● Low Price to ● IPOs and buy
Sales Ratio backs
● Small Firm effect ● Pay out effect
 ● Day of the week effect.
● Month of the year effect.

Calendar Anomalies → January Effect

● Tax day Effect
● Holiday Effect
● Time of the day Effect
● Turn of the Month Effect
Reasons why EMH may be
incorrect
Reasons
● Reason 1: Different investors with different point of view
● Reason 2: Stocks taking time to respond to new information
● Reason 3: Stock prices affected by human error or emotional decision
making
● Reason 4: Abnormal profit gains because of market anomalies
Efficient Market Hypothesis : A
critical review of Literature &
Methodology
From the paper - by Novickyte & Degutis
● Important for investors ● According to the style of ● Volatility is a key
and corporate executives trading, (Goedhart, Koller, contradiction to EMH →
● Develop stock markets Wesley) categorised → Markets are:
1. Inefficient= Macro level
● Related to capital markets 1. Intrinsic Value
2. Efficient= Micro level
● Efficient markets - cannot Investors ● Seasonal anomalies →
gain abnormal profits (by 2. Traders Earning excess profit
Allen, Brealey & Myers) → 3. Mechanical Traders ● Gambler’s Fallacy,
1. Stock prices adjust ● Economist A. Cowels - irrational behavior →
according to the Random walk concept → creates ambiguity in EMH
concept
information available. cannot earn excess profit
2. Investors are risk Keynes found → risks are
averse. responsible and not future
price predictions
* Divides markets into Weak, ● In the modern approach →
Semi-strong & Strong Efficient tests to prove the three
markets. forms of market came into
picture.
Thank You!