Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
14Activity
0 of .
Results for:
No results containing your search query
P. 1
23. Weak-Form Efficiency Testimony of Dhaka Stock Exchange

23. Weak-Form Efficiency Testimony of Dhaka Stock Exchange

Ratings: (0)|Views: 831 |Likes:
Published by MD. REZAYA RABBI

More info:

Published by: MD. REZAYA RABBI on Oct 30, 2009
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

03/17/2011

pdf

text

original

 
Electronic copy of this paper is available at: http://ssrn.com/abstract=940811
 
1
 
Weak-form Efficiency: Testimony of Dhaka Stock Exchange
Shofiqur Rahman
*
 Mohammad Farhad Hossain
**
 Abstract:
The focus of this paper is to seek evidence whether Dhaka Stock Exchange(DSE) is efficient in the weak form or not by hypothesizing normality of the distribution series and random walk assumption. Both non-parametrictests [(Kolmogrov-Smirnov goodness of fit test), run test, Lilliefors test],Q-Q probability plots and parametric-tests [Auto-correlation coefficienttest and ARIMA (0,1,0) for testing random walk model] have been used.Each statistical test has been performed separately on two data sets. Thedata sets include daily All-Share Price Indices (ASPI) and DSE GeneralPrice Indices (DSE-GEN) for 12 years ranging from 1994 to 2005. Inaddition, daily stock price data for 33 companies have been used. The dailyreturn series, in the aspect of skewness and kurtosis, were found non-normal, which can be categorized as positively skewed distribution. Samething resulted from Kolmogorov-Smirnov (K-S) test. As a result, nullhypothesis of normality has been rejected and alternative hypothesisremained in effect. Run test and auto-correlation results rejected therandomness of the return series of DSE simultaneously. Overall resultsfrom the empirical analysis suggest that the Dhaka Stock Market of Bangladesh is not efficient in weak-form.
INTRODUCTION
Capital market efficiency has been a debatable issue since its inception. After Bachelier (1900), several researchers tried to reach a solid conclusion on it but could not. Because,efficiency, on a large extent depends on investment patterns, structure of market,investors’ risk appetite and practice etc. Unlike past security prices, all other factors makea capital market more vibrant. As a result, market efficiency has still become within thecontinuum of hypothesis. The concept of efficiency is extremely important in finance because the hypothesis that securities markets are efficient represents the basis for mostresearch that is made in financial economics. For managers, efficient market implies thatthey can receive a
“fair value”
for the securities they sell and they can implement their goal of maximization of shareholders’ wealth by focusing on the effect each decision will
*
Lecturer in Finance, Faculty of Business, Northern University, Dhaka, Bangladesh
**
Associate Professor, Faculty of Business Administration, American International University - Bangladesh
 
Electronic copy of this paper is available at: http://ssrn.com/abstract=940811
 
2
have on the share price. Another implication of efficient markets is that creativeaccounting will not result in price changes because accounting manipulations do not affectcash flows, thus they are not reflected in prices. EMH also has strong implications for security analysts. When future returns cannot be predicted from past returns, trading basedon an examination of the sequence of past prices becomes worthless. If the semi-strongform of the hypothesis is supported, then financial analysts cannot devise trading rules based on publicly available information. Most of the researches on the capital marketefficiency are concentrated on the major stock markets of the world (Summers (1986),Fama and French (1988), Lo and MacKinlay (1988) and Poterba and Summers (1988)).The focus of this study is to testify the efficiency of Dhaka Stock Exchange. The purposeof this research is to seek evidence whether Dhaka Stock Exchange (DSE) is efficient inthe weak form or not
.
Before starting the discussion of the study finding, a discussion on previous empirical studies would be
CONCEPTUAL FOUNDATION AND EVOLUTION OF EMH
The concept of efficiency is central to finance. Market efficiency is a term that is used inmany contexts with many different meanings. For example, there can be informationalefficiency or operational efficiency. Economists refer to operational efficiency asemphasizing the way resources are employed to facilitate the operation of the market. Thisstudy is concerned with the informational efficiency only.With respect to an information item (termed
φ
a
), a capital market is termed
“efficient”
 only if the prices of capital market securities fully impound the return implications of thatitem. This definition can be expressed as:
ƒ
(R 
i,t
, R 
 j,t
… … …
 
φ
Mt-1
) =
ƒ
( R 
i,t
, R 
 j,t
… … …
 
φ
Mt-1
,
φ
at-1
), where
ƒ
(.) = a probability distribution function, R 
i,t
= the return on security
i
 in period
t,
 
φ
Mt-1
= the information set used by the market at
t – 1,
φ
at-1
= the specificinformation item placed in the public domain at
t 1
. Defining market efficiency in thisway has two important implications, such as (1) an investor cannot use
φ
at-1
to earnnonzero abnormal return, and (2) in an efficient market, when a new information item isadded to the information set,
φ
M
, its revaluation implications for 
ƒ
(
i,t,
 j,t, … …
) areinstantaneously and unbiasedly impounded into the current market price.
 
 
3
The concept of market efficiency was originally anticipated by Bachelier (1900). Therewere subsequent works such as Working (1934), Cowles and Jones (1937), Kendall(1953). But Bachelier’s contribution receives more highlights after it was published inEnglish by Cootner (1964). Fama (1965) was, however, the first to use the term “efficientmarket. Fama extended the process of formalizing the concept of ‘efficiency’ in economicterms by defining an efficient market as one in which prices always fully reflects availableinformation. Fama (1970) stated that the sufficient – but not necessary – conditions for efficiency are: (i) there are no transaction costs in trading securities; (ii) all availableinformation is costlessly available to all market participants, and (iii) all agree on theimplications of current information for the current price and distributions of future pricesof each security. In his review of literature, Fama (1970) divided his work on efficientmarket into three categories depending on the types of information and how quickly thisinformation is impounded in prices: (1) weak-form EMH, (2) semi-strong EMH, and (3)strong-form EMH. This classification was the first recognition that efficiency must bedefined with respect to a particular information set. Weak-form efficiency exists if security prices fully reflect all the information contained in the history of past prices and returns. If capital markets are weak-form efficient, then investors can earn excess profits fromtrading rules based on past prices or returns. Under semistrong-form efficiency, security prices fully reflect all public information. Thus, only traders with access to nonpublicinformation (some corporate insiders) can earn excess profits. However, in semistrong-form efficiency, the market reacts so quickly to the release of new information that thereare no profitable trading opportunities based on public information. Finally, under strong-form efficiency, all information, even apparent company secrets, are incorporated insecurity prices; thus, no investor can earn excess profit trading on public or nonpublicinformation.Fama’s (1970) review has stimulated a definitional debate that extended for almost twodecades. LeRoy (1976) criticized Fama’s definition of market efficiency, because it allowsany feasible set of return definition to be consistent with efficiency. Fama (1976) revisedthe definition by requiring that
‘the market correctly uses all available information’ 
andthus the joint distribution of future prices established by the market is identical to the‘correct’ distribution implied by all available information at that time. Fama (1991)reviewed again the literature on EMH but changed the previous classification to reflect thenew trend in academic research. He replaced the
weak-form efficiency
with
tests for 

Activity (14)

You've already reviewed this. Edit your review.
1 hundred reads
1 thousand reads
edove liked this
Saeed Abedin liked this
sugath liked this
djlaksh liked this
habrar619 liked this
habrar619 liked this
Shehid liked this

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->