Efficient Market Hypothesis in Emerging Capital Markets
A REVIEW
OF
STUDIES CONDUCTED ON
THE WEAK FORM OF THE EFFICIENT MARKET
HYPOTHESIS
ON
EMERGING CAPITAL MARKETS
Surabhi Kothiyal
(2009B3A8360P)
Vishnukaant Pitty
(2009A4PS340P)
1
CONTENTS
PAGE NO.
1. Introduction
3
2. On Emerging Markets …
5
3. Empirical Methods
8
3.1. Non-Parametric Tests
8
3.1.1. Kolmogrov Smirnov Goodness of Fit Test
9
3.1.2. Runs Test
9
3.2. Parametric Tests
10
3.2.1. Auto-Correlation Test
10
3.2.2. ADF (Augmented DickeyFuller) Test
11
3.2.3. PP (Philips Perron) Test
12
3.2.4. Auto-Regression Test
12
3.2.5. ARIMA Model
12
3.2.6. GARCH Model
13
4. Anomalies and Market Efficiency
16
4.1. Turn-Of-The-Year Effect (January Effect)
16
4.2. Weekend Effect (Monday Effect)
17
5. Conclusion
19
6. Bibliography
22
7. Appendix
25
2
INTRODUCTION
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
OF
STUDIES CONDUCTED ON
THE WEAK FORM OF THE EFFICIENT MARKET
HYPOTHESIS
ON
EMERGING CAPITAL MARKETS
Surabhi Kothiyal
(2009B3A8360P)
Vishnukaant Pitty
(2009A4PS340P)
1
CONTENTS
PAGE NO.
1. Introduction
3
2. On Emerging Markets …
5
3. Empirical Methods
8
3.1. Non-Parametric Tests
8
3.1.1. Kolmogrov Smirnov Goodness of Fit Test
9
3.1.2. Runs Test
9
3.2. Parametric Tests
10
3.2.1. Auto-Correlation Test
10
3.2.2. ADF (Augmented DickeyFuller) Test
11
3.2.3. PP (Philips Perron) Test
12
3.2.4. Auto-Regression Test
12
3.2.5. ARIMA Model
12
3.2.6. GARCH Model
13
4. Anomalies and Market Efficiency
16
4.1. Turn-Of-The-Year Effect (January Effect)
16
4.2. Weekend Effect (Monday Effect)
17
5. Conclusion
19
6. Bibliography
22
7. Appendix
25
2
INTRODUCTION
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
Bibliography: Different researchers define the emerging market in different ways. For instance, Samuel’s (1981), who states the nature of the emerging market in terms of the information information, and possibly greater uncertainty about the future (Taylor, 1956; Goldsmith, 1971; Mason, 1972; Wai and Patrick, 1973) – and so this, on the other hand, leads to a