Stock

Markets and Market Eciencies

What is Market Eciency ?

When investments are made in to the stock market, the investors,
obviously, expect a return. This is mainly prac:ced by purchasing
and selling shares to outperform the rest of the market.

However, market eciency, suggests that at any given :me, prices
fully reect all available informa:on on a par:cular stock and/or
market.

Thus, according to the EMH, no investor has an advantage in
bea:ng the market because no one has access to informa:on not
already available to everyone else.

Ecient Market Hypothesis (EMH)

Formulated by Eugene Fama in 1970

EMH is a theory that claims is impossible to "beat the market" since
market eciency causes exis:ng share prices to reect all relevant
informa:on instantly.

EMH argues that , stocks are trade at their correct value and any
change of circumstance will immediately reect on the share price.
It is impossible for investors to purchase undervalued stocks or sell
stocks at inated prices.

Types of Market Eciencies

Weak
Semi-Strong
Strong

Weak Market Eciency

The weak-form EMH asserts that stock prices already reect all
informa:on that can be derived by examining past published
informa:on.

This version of the hypothesis implies that historical analysis is
fruitless.

Past stock price data and nancial records are publicly available and
virtually costless to obtain. The weak-form hypothesis holds that if
such data ever conveyed reliable signals about future performance,
all investors would have learned long since to exploit the signals.

However in certain weak markets, early ac:on may result in extra
prots.

Earnings Announcements in Weak Eciencies

Semi Strong Market Eciency

The semi strong-form EMH states that all publicly available
informa:on regarding the prospects of a rm must be already
reected in the stock price.

Such informa:on includes, fundamental data on the rms product
line, quality of management, patents held, earnings forecasts,
accoun:ng prac:ces, and so forth.

Again, if any investor had access to such informa:on from publicly
available resources, one would expect it to be reected in stock
prices.

However in certain semi-strong markets, early ac:on on these
informa:on may result in extra prots.

Dankotuwa Porcelain Events

In May 2009, some Japanese Investors did a pre feasibility study
having inten:on to buy the company. This news leaked to the
market and due to the specula:on, the share price started to rise.
On 30th June 2010, there was news that company was going to be
liquidated. The market reacted by dropping the price.

On 5th Aug, the company announces that they are not going to
liquidate but holding nego:a:ons with new investors to invest in
the company. In specula:on the share price started rallying in
August

Source : CSE
30-Nov-10

23-Nov-10

16-Nov-10

9-Nov-10

2-Nov-10

26-Oct-10

19-Oct-10

12-Oct-10

5-Oct-10

28-Sep-10

21-Sep-10

14-Sep-10

7-Sep-10

31-Aug-10

24-Aug-10

17-Aug-10

10-Aug-10

3-Aug-10

27-Jul-10

20-Jul-10

13-Jul-10

6-Jul-10

29-Jun-10

22-Jun-10

15-Jun-10

8-Jun-10

1-Jun-10

Dankotuwa Porcelain Share Price Movements

160

140

120

100

80

60

40

20

Amaya Reef


In 1st week of October 2010, acquisi:on of seven acre land at
Waskaduwa beach Front and appointment of Mr. Prema Cooray
as a Director

In 1st week of December 2010, company acquired 35 acre land
in AkkaraipaYu having 700 m beach front and planned to build a
4 star resort hotel

0
1/10/2011

12/20/2010

11/29/2010

11/8/2010

10/18/2010

9/27/2010

9/6/2010

8/16/2010

7/26/2010

7/5/2010

6/14/2010

5/24/2010

5/3/2010

4/12/2010

3/22/2010

3/1/2010

2/8/2010

1/18/2010

Amaya Reef Share Price Movements

120

100

80

60

40

20

The increase in poultry,although the chicken

consump:on was expected to increase with the
growth in economy and the increase in tourist
arrivals, the increase was way over ra:onal
jus:ca:on

Apple Vs Samsung
April 14, 2011 - Apple Inc has sued rival Samsung Electronics
claiming that the South Korean rm's Galaxy line of mobile phones
and tablets "slavishly" copies the iPhone and iPad, according to
court papers
April 20, 2011 - Samsung Electronics Co. said it sued Apple Inc.
(AAPL) claiming patent infringement, a week acer the iPhone
maker led a complaint in U.S. federal court alleging the South
Korean company copied its products.

Samsung Share price Varia:ons

Apple Sue Samsung

Samsung sue Apple in defense

Strong Market Eciency

The strong-form EMH states that stock prices reect all informa:on
relevant to the rm, (past and future)

This version of the hypothesis is quite extreme.

Time lag between informa:on dissemina:on and price reec:on is
almost zero.

Cumulative
abnormal
return,
percent
36
32
28
24

Cumulative
abnormal
return,
percent
36
32
28
24
20

20

16

16

12

12

4
8
12

8
12
16
135 120 105

16
F I G U90
R E 175
3 . 5 60
135 120 105

FIGURE 13.5

90

45

75

60

30

45

15

30

15

15

15

Days relative to
announcement
30 date

Days relative to
announcement
30 date

The performance of the stocks of target companies compared with that of the market. The prices of target
stocks jump up on the announcement day, but from then on, there are no unusual price movements. The
announcement of the takeover attempt seems to be fully reflected in the stock price on the announcement day.

Keown
andcompanies
J. Pinkerton, compared
Merger Announcements
and
Insider
Trading
Activity,
of Finance 36 (September
The performance of theSource:
stocksA.of
target
with that of
the
market.
The
pricesJournal
of target
1981),
pp.
855869.
stocks jump up on the announcement day, but from then on, there are no unusual price movements. The

HVA Foods Share Price FluctuaLons

This car is
for free

Two economists walking down the street. They spot a $20

bill on the sidewalk.
One starts to pick it up, but the other one says, Dont
bother
if the bill were real someone would have picked it up
already.

Insider Trading

Illegal insider trading refers generally to buying or selling a stock, in
breach of a duciary duty or other rela:onship of trust and
condence, while in possession of material, nonpublic informa:on
about the stock.

Insider trading viola:ons may also include ":pping" such informa:on,
securi:es trading by the person ":pped," and securi:es trading by
those who misappropriate such informa:on.

Examples of insider trading

Corporate ocers, directors, and employees who traded the
corpora:on's securi:es acer learning of signicant, conden:al
corporate developments

Friends, business associates, family members, and other ":ppees" of
such ocers, directors, and employees, who traded the securi:es
acer receiving such informa:on;
Employees of law, banking, brokerage and prin:ng rms who were
given such informa:on to provide services to the corpora:on whose
securi:es they traded;
Government employees who learned of such informa:on because of
their employment by the government; and Other persons who
misappropriated, and took advantage of, conden:al informa:on
from their employers.

The Wall Street Journal " columnist R. Foster Winans was convicted
in 1985 of giving informa:on to two stockbrokers about stocks he
was planning to write about in the "Heard On The Street" column.

They used the informa:on to make about $690,000. Winans cut
was $31,000. Winan was sentenced to 18 months in prison

Prin:ng company worker William Jackson and stockbroker Brian

Callahan were convicted of insider trading in 1990 for using stock
informa:on in "Business Week" magazine before it was distributed
to the public. The magazine was printed by Jackson's employer, R.R.
Donnelley. The government said Jackson and Callahan made over
$19,000 each in prots each. They were ordered to repay personal
prots and were ned $37,445.

Once the CEO of investment bank Keefe, BruyeYe & Woods, James
McDermoY was convicted of insider trading in 2000 for giving
informa:on about pending bank industry mergers to his mistress
Kathryn Gannon, an adult-movie star , who went by the name
Marilyn Star. McDermoY was sentenced to eight months in prison,
while Gannon received a three-month term. McDermoY was ned
$25,000.

Former ImClone CEO Samuel Waksal and friend Martha Stewart,

was sentenced to 87 months in prison and ned $3 million acer
pleading guilty to six counts, including insider trading and fraud.
Waksal sold ImClone stock acer nding out regulators had
rejected an applica:on for the company's new cancer drug ,
Erbitux.