Efficiency Measures of Capital Market

Only available on StudyMode
  • Download(s) : 180
  • Published : March 14, 2012
Open Document
Text Preview
www.ccsenet.org/ijbm

International Journal of Business and Management

Vol. 7, No. 1; January 2012

Efficiency Measures of Capital Market: A Case of Dhaka Stock Exchange Naznin Sultana Chaity (Corresponding author) School of Business, Ahsanullah University of Science and Technology 141-142, Love Road, Tejgaon Industrial Area, Dhaka-1208, Bangladesh E-mail: nschaity@gmail.com Sanjida Sharmin School of Business, Ahsanullah University of Science and Technology 141-142, Love Road, Tejgaon Industrial Area, Dhaka-1208, Bangladesh E-mail: sanjida294@yahoo.com Received: July 29, 2011 doi:10.5539/ijbm.v7n1p102 Abstract Dhaka Stock Exchange has experienced two market crashes since its inception (November 1996 and December 2010). The regulator tried to reform the market as an efficient market by taking various measures. This study is designed to measure market efficiency level of DSE; Market efficiency is used to explain the relationship between information and share price in capital market, following whether or not returns in a market follow a random walk process over a longer period of time. For testing of market efficiency, we conducted normality test along with serial dependencies of stock return from one period to another. The Result of the study indicates that the DSE is not ‘Weak form of Efficient’ and not follow ‘Random Walk model’. Keywords: Random walk, Efficient market hypothesis, Serial correlation, ARIMA 1. Introduction Dhaka Stock Exchange was first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and started trading from year 1956. After the Liberation War in 1971 the trading was discontinued for five years. DSE again started its activities in 1976 with only 9 listed companies, having a total paid up capital of Tk. 137.52 million. The actual growth of the stock exchange in Bangladesh (the DSE) started since 1983, when the market capitalization was Tk. 812 million. In the Dhaka Stock Exchange (DSE), there were 412 securities listed as on December 2008, Dec'10, and June'11 there were 445 and 490 listed securities. Since its inception DSE faces tremendous ups and down, two market crashes, and so on. Regulators tried to improve its condition by imposing different rules and regulation. Along with recent crashes in capital market, DSE is not considered as efficient market and investors tend to lose their confidence on it. Market Efficiency is defined by Fama (1970 and 1991) as a market in which prices always fully reflect all available information. He argues that the allocation of the ownership of the economy’s capital stock, which represents the primary role of the capital market, is ideally fulfilled if the market is efficient, because prices from such a market provide accurate signals for resource allocation. The Efficient Market Hypothesis (EMH) does not say prices are random, but that price changes in an efficient market are random and independent. Efficiency is defined at three different levels, according to the level of information reflected in the prices - weak- form, semi-strong and strong form. Weak form version asserts that price of financial assets reflect all information contained in the past prices. Semi strong version postulated that prices reflect all the publicly available information where as strong form says that prices of financial assets reflect in addition to information on past prices and publicly as well as privately available information. The random walk hypothesis (Melkiel 1973) is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the Accepted: September 9, 2011 Published: January 1, 2012

URL: http://dx.doi.org/10.5539/ijbm.v7n1p102

102

ISSN 1833-3850

E-ISSN 1833-8119

www.ccsenet.org/ijbm

International Journal of Business and Management

Vol. 7, No. 1; January 2012

stock market cannot be predicted. The theory states that stock price changes have the same distribution and are...
tracking img