STUDIES CONDUCTED ON
THE WEAK FORM OF THE EFFICIENT MARKET
EMERGING CAPITAL MARKETS
2. On Emerging Markets …
3. Empirical Methods
3.1. Non-Parametric Tests
3.1.1. Kolmogrov Smirnov Goodness of Fit Test
3.1.2. Runs Test
3.2. Parametric Tests
3.2.1. Auto-Correlation Test
3.2.2. ADF (Augmented DickeyFuller) Test
3.2.3. PP (Philips Perron) Test
3.2.4. Auto-Regression Test
3.2.5. ARIMA Model
3.2.6. GARCH Model
4. Anomalies and Market Efficiency
4.1. Turn-Of-The-Year Effect (January Effect)
4.2. Weekend Effect (Monday Effect)
In finance, the efficient-market hypothesis (EMH) asserts that financial markets are ‘efficient’ in terms of information. Accordingly, it can be said that an investor cannot consistently exploit the market to realize inordinate returns, given only the information that is available at the time that the investment is made. What this means is that, on a riskadjusted basis, the average return on the market cannot be defied consistently by any investor.
There are three major versions of the EMH: The ‘weak’ form, the ‘semi-strong’ form, and the ‘strong’ form. The weak-form EMH claims that prices on traded assets (e.g. stocks, bonds, or property) already reflect all past publicly available information. The semi-strongform EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong-form EMH additionally claims that prices instantly reflect even hidden or "insider" information. In weak-form efficiency, it is implied that the future prices of assets on the market cannot be predicted by analyzing the past prices of these goods. (i.e. - excess returns cannot be earned in the long run via investment strategies that are based on historical share prices or other historical data).
Hence, share prices exhibit no serial dependencies, meaning that there are no correlated ‘patterns’ to be found within the asset prices. This implies that future price movements are determined entirely by information not contained within the price series data. Hence, prices must follow a ‘random walk’. This 'weak' EMH basically means that market participants should not be able to systematically profit from any market 'inefficiencies'. In semi-strong-form efficiency, it is said that the share prices adjust to new and publicly available information very rapidly; and does so in an unbiased manner, so as to not allow any order of excessive returns to be earned by trading on the market on the basis of that information. Hence this implies, for an investor, that neither fundamental analysis nor technical analysis techniques will be able to reliably and consistently produce returns that are in excess of the market average. To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner.
In strong-form efficiency, what is implied is that the share prices reflect all information, public and private (i.e. – even insider information), and no one can earn excess returns consistently.
In other words this translates to the following: if, for a market, there are legal barriers to private information becoming public (as in the case of insider trading laws), then strongform efficiency is impossible on that market, unless these laws are universally ignored. To test for...
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