(London School of Commerce

)
M.B.A (II) (FINANCE) ASSINGMENT: Investment management And Capital Markets CRITICAL REVIEW
THE EMPIRICAL RESEARCH ON MARKET EFFICIENCY AND CONCEPT OF THE EFFICIENT MARKET HYPOTHESIS

NAME:

NIKUNJ PATEL

STUDENT ID: 0661SWSW1109 TUTOR:

VIJAY SHENAI and MAKAILLA McCONNEL

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INTRODUCTION
THEORY OF EUGENA FAMA:

The efficient market hypothesis developed by Eugena Fama in the year 1906s at university of Chicago booth school of business.EMH says any given time; asset all prices reproduce all accessible information. In same manner suggestion is one of the most divisive ideas in all of science research. At all times under the efficient market hypothesis, we buying and selling securities. If existing market and efficient, that means price always replicate to all information. One of the Management information technology finance professor Andrew LO writes said about EMH ³it is disarmingly simple to state, has far reaching cost for educational pursuits and business practice and yet it is amazingly flexible to experimental proof or refusal.´In financial nature no any limit for information. It may be predict of investor correct or wrong. The EMH theory trying to beat the marketplace and becomes game of chance not ability. According to EMH, stock always trade at their fair value on stock exchange. Its making for investors for trading to stock for inflated price.EMH start in 1965 with Nobel price awarders Paul Samuelson articles.´ evidence that right likely price change aimlessly ³other finance professor Eugene Fama with his 1970 paper ³Efficient capital market ³this person coined the term EMH and made it operational with the initial description that in efficient markets, and price fully reflect all available information. In this matter, no information or no analysis can be expected to result in outperformance of an suitable standard. Because of the large accessibility of public information. It is nearly impossible for a personality to hit the market constantly.

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According to FAMA, he introduced in market efficiency place three type of hypothesis, weak form efficiency, semi strong form efficiency and strong form efficiency.
Weak Form Efficiency: this theory weak from efficiency indicated future

price cannot be predicted by analyzing prices from the past. The historical data cant using by investment earned by long run excess. Also technical investigation cannot adjustable to risen excess returns. In some way fundamental study will provide excess returns. When EMH do predict that all price movement is random, many studies done on market propensity. For the stock market to tender over time periods of week or longer.
Semi strong Form Efficiency: In this efficiency share price increasingly

very rapidly and new information spread quickly. Semi strong efficiency adjustable to technical study and fundamental study will able to consistently to make excess returns. To test of semi strong efficiency reliable upward and downward adjustments and recently changes find out and look after it. This efficiency would advice to investors had interpreted the information in a biased fashion and therefore in an incompetent manner.
Strong Form Efficiency: In public and private can¶t earn excess returns

when share prices reflect all information. Strong form efficiency is impossible when private firm transfer in to public sector. In the term of strong form efficiency, a market requirement to survive where investors cannot constantly earn excess returns over a long period of time.

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THEORY OF BURTON MALKIEL: Professor, Burton Malkiel of

Princeton, suggested that throwing darts at the newspaper stock listings is as good a way as any to pick stocks and is likely to hit most processional investment managers. He advice in the later part of his work how maintain on trying to hit the market might challenge to do so, but he indicates that they are doubtful to be successful. Andrew Lo´s volumes bring together some of the most important contributions, counting a paper called simply Noise by the late Fischer black. It says. Noise in the sense of a large number of small events makes trading in financial markets probable. Noise cause markets to be somewhat inefficient, but often prevents us from taking advantage of inefficiency. Also writers Burton Malkiel latest edition of his book and add new chapter´ The Assault on the Random Walk Theory: first he done the market expectable than he writes´i Have reviewed all the recent research proclaiming the demise of the efficient market theory and purporting to show that market price are, in fact predictable. My conclusion is that such obituaries are greatly exaggerated and the extent to which the stock market is usefully predictable has been vastly overstated´ Pricing irregularities and predictable patterns in stock returns may well exist. Also market evaluation will be corrected. Increasing cleverness of his databases and empirical research. He represented departures from efficiency and further patterns in the development of stock returns.

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THEORY OF BERTUS, JAHERA AND YOST:

According to Mark Bertus, John S. Jahera,Tr;Keven Yost. Issue the one of the article like ³The relation between bank regulation and economic performance a cross country analysis´. And published banks and banks system in 2007 volume 2 issues 3 at Auburn University, USA. .Articles purpose of understanding Bath, Caprio and Levine BCL (2006) plan a questionnaire with 262 questions and distributed to central banking authorities of 153 countries. This Articles presented by all these researcher its says Country GDP ,Annual GDP ,Growth rate, inflation rate for 2000-2004.they also collected data the information related corruption and democracy from La Portal, Lopez-de²Silages, Shelter and Vishnu (1999).BCL represented the relationship of these factors with financial sectors of the country. According to Bertus, Jahera and Yost, Global financial markets are a fundamentals ingredient in the production and maintenance of the world¶s economic activity. These three author said against banking system is the very important factors of financial market. And it is covere d recognize that a well structured banking system, find out by its managerial practice, risk taking, and governance, promotes greater financial presentation and economic strength. And also they present with argue to corruption, democracy, and legal origin. For example create heterogeneous regulatory environments that implicated the performance of across the world efficient policies. The studied of the empirically evaluate the association between system characteristics and its level income and growth. This Article shown an over the past two decades most of all financial crisis and which leaves the negative effects on economic around the
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world. Writers argue that the main cause of these can be unsound banking practices, such as shifting toward non-traditional business revenue or risen the risk profile of loans. Bertus,Jahera and Yost have specified that Bath,Caprio and

Levine(BCL) find a positive relation between bank development and the strength of a countries capital regulatory policy. And other research done by (santos,2001;Koehn and Santomero,1980;Kim and Santomero ,1988;Besanko and Kanatas ,1996;and Blum 1999)advice that more stringent capital needed may not reduce the risk taking behaviour of banks. So According to author BCL reports mixed proofed on the relation between capital regulation and bank stability. In addition they find managerial oversight is positively related to bank development, even controlling for country specific description.

SUGGESTIONS FOR IMPROVEMENTS:

Bertus, Jahera and Yost have carried out good research to find out relationship between bank rule and economic presentation. They have collected qualitative source of information like research of BCL and other writers and also from Basel committee some banking authorities from all over the world. They also demonstrate their research very well with tables and numeric information. The weak side of this research is authors have used as much as secondary data collected from past research done by other on same related topic. Other author have done in research method and they provided by Basel committee telling capital authoritarian. And managerial oversight but they also admit that there is no direct proof on
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how rigid guiding principle and policy for domestic banking system involve the economic presentation of a country. For suggestions of this topic the research paper author would collect data by surveys regarding subjects. They can also used internet to collect more up dated information, interview of the different financial authority would gives more relevant and qualitative information.

DEPENDABILITY AND VALIDITY OF THE TOPIC:

According to Bertus, Jahera and Yost finally proved that well execution financial system encourage the financial growth within countries and have effectively found the target of research. They research relationship between bank regulation and economic performance and cross country analysis. From the empirical result findings can be referred to as reliable and can be reproduced under the similar methodology. As on the basis of concussion and implication of paper it can be said that result in the articles is dependable and applicable because it is free from influence in the language in the paper.

EMPIRICAL RESULT:

Theory of Bertus, John and Yost has empirically examined the relation between economic presentation and authoritarian policies. While controlling for fiscal and political situation within a country. The result of this theory reliable with the concept that improved information confession forces banks to operate more efficiently. This is a benefit for most advantageous allocation of resources. End of the result they
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identify that possible endogeneity fault might have exist. Because higher level of income may have more wealth at risk. And therefore demand higher levels of information. They identify between income and regulatory variables rather than causation.

The Evidence on market Efficiency: Time Series properties of price Changes: In the financial markets

investors have to find put price charts and price patterns as tools for expecting to price movement in the future. In first studies of market efficiency depends upon relationship between price changes over time. Some testing was focused on the random walk theory of price activities. As a time series of studies divided in two parts like on short term price behaviour and research that long term price movements. Short run indicated by serial correlation, filter rules, runs tests.
Market inefficiencies and Money Manager Performance: the

evidence on market is conflicting. And in stock prices in turn in the long term and returns are higher in January and evidence of market anomaly. Small market covered firms with low price to book and price to earnings ratio same like hit the market. And also evidence of money managers liable to develop these findings to hit the market. With explanations in hypothetical studies that the transactions cost and implementation trouble with converting these inefficiencies into portfolios overwhelms the surplus returns. According to Pradhuman (2000) this phenomenon by nothing that little capture stock have underperformed large capture stock in approximately one out of every four years in the last 50 years. Bernstein (1998) notes that while value investing may earn surplus
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returns over long periods. Development investing has outperformed value investing over many five year periods during the last three decades.
Evidence on Insiders and Investment Professionals: many insiders,

analysts and portfolio managers must possess benefit investors in the market and capable to change this advantage in to surplus returns. The SEC indentified for from trading in advance insider to be office or director of the firm or a major stockholder. Insiders are banned for the trading for information of the company and when needed for the SEC when they buy or sell stock in the company.

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CONCLUSION

It is widely accepted that a well performance financial system promotes financial development within a country. Banks, in particular help case the allocation of capital. Reduce costs associated with information asymmetry. And enforce internal oversight. By reducing these barriers, banks play a significant role in promoting financial development.

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REFERENCE

Andrew Lo, Market Efficiency: stock Market Behaviour in Theory and practice, two articles including Eugene famas seminal 1970 review, Paul Samuelsons 1965 articles and Fischer Blacks 1986 articles. Andrew Lo and Craig Mackinlay, A Non-Random Walk Down Wall Street, Burton Malkiel A Random Walk Down Wall street, a long time beatseller,First Published in 1973 and now in preparation for its seventh edition. Authors@Google Burton Malkiel wn.com/Authors@Google_Burton_Malkiel Barth J.Caprio, G lavine, and R.2001.Banking system around the globe: Do regulation and ownership affect performance and stability? In Miskin F.S (Ed0prudential supervision: what works and what doesn¶t 31-96 university of Chicago press. Chicago. ³Bank supervision and corporate finance´ Beck, T Demirgic-Kunt, A.LevineR.2003.The World Bank research department paper series 3042. Blum J.1999.Do bank capital adequacy requirements reduce risks? Journal of Banking and Finance 23,755-771. Chicago GSB Magazine: Winter 2007 www.chicagobooth.edu/magazine/vol29/issue01/facultydigest3.aspx

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Coase.R.2000.The nature of the firm economica4.386-405. Caprio, G, Levine R, 2002.Corporate Governance Bank: concepts and international observation. In Litan R.E.Pomerleano M.Sundarajan, V, Financial Sector Governance the Roles of Private and public sectors 1750 brooking institution press, Washington, D.C. Eugene Francis ³gene´fama American economist, first introduced portfolio theory en.wikipedia.org/wiki/Eugene_fama Eugene famas (1970) survey raises questions about capital markets www.frbsf.org/publications/economic/review/1990/90-2_29-40.pdf Random Walk Theory en.wikipedia.org/wiki/Random_walk_hypothesis Book Review:´The Elements of investing ³By Burton G.Malkiel &Charles D.Ellis http://www.dailymarkets.com/stock/2010/03/29/book -review-theelements-of-investing-by-burton-g-malkiel-charles-d-ellis/ Social Research Network, Which Features Many Important papers in investment, Eugene Fama´ s Market Efficiency, Long term Returns and Behavioural financeweb.mit.edu/krugman/www-Paul krugmans website www.ssrn.com What is Market Efficiency? The EMH suggest to stock price fully reflect all available information in the market .is this possible? www.investopedia.com

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