Final Project : Seasonal Trading Patterns

The Efficient-Market Hypothesis (EMH) states that it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Although, assuming that Efficient Market Hypothesis (EMH) holds, the responding stock market indices should reflect the harm caused by the earthquake, because, as EHM states that market prices fully reflect all publicly available information (Fama, 1970). Thus, it means that, if investors are rational and their decisions are not affected by noise traders, one can conclude that the decrease in stocks’ value is explainable by the damage of the catastrophe.

In this article, “Is the efficient market hypothesis day-of-the-week dependent,”, Stephen Pop reveals significant evidence that the efficient market hypothesis is day-of-the-week-dependent. Overall, for only 62% of firms, the unit root null hypothesis is rejected on all the five trading days. He also discovers that when investors do not account for unit root properties in devising trading strategies, they obtain spurious

This financial crisis has eroded the confidence in the EMH. The validity of the EMH and the existence of the efficient market are questioned broadly. If asset prices are always correct and reflect all the relevant information concerning about its return just as the EMH has suggested, why there exists such a great bubble in the financial market during the recent financial crisis? If the market is efficient, why the market fails to predict the collapse of Lehman Brothers, Bear Stern and other large financial institutions? Overall, the EMH fails to answer such questions. Moreover, the EMH also performs poor in explaining other financial crisis. One example is the Tulipmania that occurred in the 17th century. The prices of the tulip bulbs reached extremely high level which seriously deviates from its fundamental value that was suggested by the EMH. This apparent bubble is contradicted with the prediction of the EMH. In fact, the explaining power of the EMH becomes pale when confronting financial crisis.

This section will review the theories that will guide the study and their relevance to the study. The theories to be reviewed include; Efficient Market Hypothesis (EMH), Random Walk Theory and Behavioral Finance Theory.

Efficient Market Hypothesis has been controversial issues among researcher for decades. Until now, there is no united conclusion whether capital markets are efficiency or not. In 1960s, Fama (1970) believed that market is very efficient despite there are some trivial contradicted tests. Until recently, both empirical and theatrical efficient market hypothesis was being disputed by behavior finance economist. They have found that investor have psychological biases and found evidences that some stocks outperform other stocks. Moreover, there are evidences prove that market are not efficient for instance financial crisis, stock market bubble, and some investor can earn abnormal return which happening regularly in stock markets all over the world. Therefore, the purpose of this essay is to demonstrate that Efficient Market Hypothesis in stock (capital) markets does not exist in the real world by proofing four outstanding unrealistic conditions that make market efficient: information is widely available and cost-free, investor are rational, independent and unbiased, There is no liquidity problem in stock market, and finally stock prices has no pattern.

The weak-form efficiency cannot explain January effect. In semi-strong-form efficient market, to test this hypothesis, researchers look at the adjustment of share prices to public announcements such as earnings and dividend announcements, splits, takeovers and repurchases. As time goes, later tests tend to be not supportive to EMH. For instance, semi-strong-form efficiency cannot explain the pricing/earning effect. In strong-form efficiency, the highest level of market efficiency, Fama (1991) pointed out the immeasurability of market efficiency and suggested that it must be tested jointly with an equilibrium model of expected. However, perfect efficiency is an unrealistic benchmark that is unlikely to hold in practice.

The efficient market hypothesis is constantly being analyzed for its validity in the current market. There are a multitude of external factors contributing to the reluctance of relying on the EMH. Specifically, the rise of high frequency trading has significantly called into question the legitimacy of the efficient

The efficient market hypothesis (EMH) has been subject to professional and academic debate and analysis for many years, and refers to the theory proposing that stock prices show all information regarding a firm’s value. An efficient market is a market in which investors with the same information and similar investment goals compete actively (Sewell, 2012). Many private investors and investors aiming to make profits are involved with the stock market and often make low risk investments while aiming for high rates of return. However, the efficient market hypothesis states that it is impossible to consistently outperform the stock market as the market is able to quickly adjust to new information. The Efficient Market Hypothesis also addresses

The efficient market hypothesis theory states that it is impossible to “beat the market” because of the stock market efficiency causes the existing share prices to reflect all relevant information. Critically evaluate the above statement with reference to the three forms efficient market hypothesis.

The results of chi-square check showed a negative relationship among the length of net trade cycle and return on assets. In addition, this opposite relationship was found to be different across industries. A significance relationship for approximately half of industries studied showed that results might differ from industry to industry.

The belief of the ability to make a profit by beating the market is still an economically controversial issue. Some people believe that the market is efficient, so they cannot earn more as all the stocks are at their fair prices. However, others think differently. Efficient Market Hypothesis (EMH) is know as the financial theory first developed by Professor Eugene Fama in 1970. The theory has contributed to the views of not only individual investors but also financial institutions in the capital market about the traded assets’ price relied on relevant information. In fact, this EMH theory has been controversial and disputed.

Efficient-market hypothesis also states that it is impossible for investors to consistently out-perform the average market returns, or in other words, “beat the market”, because the market price is generally equal to or close to the fair value (Fama, 1965). It is impossible, therefore, for investors to earn higher returns through purchasing undervalued stocks. Investors can only increase their profits by trading riskier stocks (http://www.investopedia.com/). However, empirically speaking, there is a large quantity of real financial examples to support that stocks are not always traded at their fair value. On Monday October 19, 1987, the financial markets around the world fell by over 20%, shedding a huge value in a single day (Ahsan, 2012). It serves as example that market price can diverge significantly from its fair value. In addition, Warren Buffett has

It could be said that both representativeness and conservatism have opposite implications for stock prices. Fama reviewed the academic studies on anomalies, finding that about half of them show overreaction and about half show under-reaction. He concludes that this evidence is consistent with the market

The efficient market hypothesis is constantly being analyzed for its validity in the current market. There are a multitude of external factors contributing to the reluctance of relying on the EMH. Specifically, the rise of high frequency trading has significantly called into question the legitimacy of the efficient market. High