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market efficiency of indian malaysian and chinese stock market

market efficiency of indian malaysian and chinese stock market

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Published by nipuntrikha
finance stock market,
finance stock market,

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Published by: nipuntrikha on Sep 02, 2010
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12/18/2012

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Chapter 1Introduction
Capital Market Efficiency
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The efficient market theory states that “prices of securities in financial markets fullyreflect all available information.” (Mishkin, 1997, 693) It is unrealistic to assume every player in the stock market knows all the relevant information and how to analyze what it means.However, “Economists have shown that efficient markets do not require that all participants haveinformation.” (Stiglitz, 1993, 267) It also is not important that all the participants know how toanalyze the information and have rational expectations as to what a securities price should be.“Not everyone in a financial market must be well informed about a security or have rationalexpectations for its price to be driven to the point at which the efficient markets condition holds.”(Mishkin, 695) All the efficient market requires is that a few people have the information.When a few participants have the information prices will move as if everyone in the entiremarket were well informed. “All it takes is a few people knowledgeable enough to recognize a bargain, and prices will quickly be bid up or down to levels that reflect complete information.And if prices reflect complete information, even uninformed buyers, purchasing at current prices,will reap the benefits.” (Stiglitz, 267)If all information is reflected in a stock’s price it is unrealistic to assume an investor can beat the average gains of the entire market, regardless of how much information he or she gathers sinceall market participants know all the relevant information. If an individual is able tooutperform the market then it is a result of luck.“You cannot ‘beat’ an efficient market any more than you can beat the track; you can onlyget lucky in it. If you are trying to make money in an efficient stock market, it is notenough to choose companies that you expect to be successful in the future. If you expecta company to be successful and everyone else also expects it to be successful, based onthe available information, then the price of shares in that company will already be quitehigh.” (Stiglitz, 267)Under an efficient market, a stock’s price moves up and down only when new,unexpected information becomes available. “Because prices in an efficient market already reflectall of the available information, any price changes are a response to unanticipated news.”(Stiglitz, 268) Since future news is unknown (whether it will be good or bad), it is impossible totell which direction the price of a stock is going to move in the future. Therefore, stocks have anequal chance of increasing or decreasing in value, a phenomenon known as a random walk.In conclusion, “The efficient market hypothesis assumes all available public informationis fully reflected in a security’s market price. It also assumes that no individual can have higher expected trading profits than others because of monopolistic access to information.” (Finnerty1976, 1141)There is, however, a possible exception to the idea that it is impossible to systematically beat the market. This exception comes in the form of insider trading.Company insiders have information unavailable to the public. These individuals havefirst hand knowledge of what the company is doing and better information concerning what thefuture might hold. If there are likely problems for the company in the future, such as poor earnings, slow growth, or lawsuits, then insiders can sell their stock before these events happen.When this information becomes public, the stock’s price should decrease. However, this pricedecrease occurs after the insider has sold his or her shares, thus avoiding the loss. In this case theinsider beat the market. On the other hand, insiders know when their company has a bright
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future, high potential earnings, innovative products being developed, etc. When the future looks bright, insiders can buy shares before the public becomes aware of these facts. The price, later,fully increases to represent the positive information. In both cases, insiders use privateinformation to beat the market.
Degrees of Efficiency
Accepting the EMH in its purest form may be difficult; however, there are three identified classificationsof the EMH, which are aimed at reflecting the degree to which it can be applied to markets.1. Strong efficiency - This is the strongest version, which states that all information in a market, whether  public or private, is accounted for in a stock price. Not even insider information could give an investor anadvantage.2. Semi-strong efficiency - This form of EMH implies that all public information is calculated into astock's current share price. Neither fundamental nor technical analysis can be used to achieve superior gains.3. Weak efficiency - This type of EMH claims that all past prices of a stock are reflected in today's stock  price. Therefore, technical analysis cannot be used to predict and beat a market.
In this project we aim at finding whether the capital markets of India,China and Malaysiaare efficient or not.
We ascertain this by performing various tests such as Correlation Tests,Runs Test and Event Study.
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