Market efficiency

This paper tests the hypothesis that irrational market misvaluation affects firms' takeover behavior. We employ two contemporaneous proxies for market misvaluation, pre-takeover book/price ratios and pre-takeover ratios of residual income model value to price. Misvaluation of bidders and targets influences the means of payment chosen, the mode of acquisition, the premia paid, target hostility to the offer, the likelihood of offer success, and bidder and target announcement period stock returns. The evidence is broadly supportive of the misvaluation hypothesis.

An alternative definition for market efficiency, based on statistical rather than financial arguments is suggested, which, though equivalent with the existing one, has some comparative advantages. Further, the implications that results from some statistical tests on return predictability may have for market efficiency are discussed.

In this paper, the authors maintain that the prevalence of technical analysis in professional investment argues that such techniques should perhaps be taken more seriously by academics. They use the new technique of genetic programming to investigate a long time series of price data for a quoted property investment company, to discern whether there are any patterns in the data which could be used for technical trading purposes. A successful buy rule is found which generates returns in excess of what would be expected from the bestfitting null time-series model. Nevertheless, this turns out to be a more sophisticated variant of the buy and hold rule, which the authors term timing specific buy and hold. Although the rule does outperform simple buy and hold, it really does not provide sufficient grounds for the rejection of the eficeint market hypothesis, though it does suggest that further investigation of the specific conditions of applicablity of the EMH may be appropriate.

Modern corporate organizations listed in the security markets periodically communicate their financial performance to stakeholders through earnings announcements. Efficient markets immediately absorb and reflect the new information into the share prices. This paper examines the effect of annual earnings announcement at the Nairobi Securities Exchange (NSE) by analyzing changes in share prices and trading volumes for the period from 2006 to 2010. Abnormal returns during the event window of 91 days were determined using the event study methodology employing the market model on data from 5 listed companies. Further, the volume reactions were examined by use of the trading activity ratio (TAR). Inferential and descriptive statistics were used to test for significant effect on TAR and price changes. The results obtained indicate that the abnormal returns and TAR were not significant at 5% probability level. Thus the NSE is of semi-strong efficiency, whereby it is not possible to earn abnormal returns in the NSE using the publicly available information.

The efficiency of the corporate bond market is not well understood. Although many of the factors used to analyze stock market efficiency translate with some adjustments to corporate bond markets, the cause-effect factor is not intuitive and can be a source of significant confusion. In this manuscript we analyze bond market efficiency in the context of a recent court decision. In recent litigation concerning allegations of securities fraud perpetrated by the American International Group (AIG), the federal district court for the Southern District of New York declined to certify a class of bondholders, citing lack of common questions of law or fact. The decision turned on an empirical analysis of whether certain AIG bonds traded in an open, developed and efficient market. If the market for these bonds had been found efficient, there would have been grounds to certify the bondholders as a class. Ironically, the court found insufficient empirical evidence to hold that the $1.71 billion i...

We test for a relation between football match results and the specific national stock index returns during the period 1990–2006 by means of an event study approach. We employ two different econometric frameworks to cross-check our results and prevent them from being solely model driven: the constant mean model and a two-state Markov-switching market model. Both approaches find no significant

Roman Kräussl), [email protected] (André Lucas), [email protected] (David Rijsbergen), [email protected] (Pieter Jelle van der Sluis), and [email protected] (Evert Vrugt). We thank Hersh Shefrin, and seminar participants at the VU University, De Nederlandsche Bank and APG Asset Management for useful comments and suggestions.

Saunders (1993) and Hirshleifer and Shumway (2001) document the effect of weather on stock returns. The proposed explanation in both papers is that investor mood affects cognitive processes and trading decisions. In this paper, we use a database of individual investor accounts to examine the weather effects on traders. Our analysis of the trading activity in five major U.S. cities over a six-year period finds vistually no difference in individuals propensity to buy or sell equities on cloudy days as opposed to sunny days. If the association between cloud cover and stock returns documented for New York and other world cities is indeed caused by investor mood swings, our findings suggest that researchers should focus on the attitudes of market-makers, news providers or other agents physically located in the city hosting the exchange. NYSE spreads widen on cloudy days. When we control for this, the significance of the weather effect is dramatically reduced. We interpret this as evidence that the behavior of market-makers, rather than individual investors, may be responsible for the relation between returns and weather.

Many previous studies on insider trading are based on data in the U.S. capital market and conclude that insiders can earn abnormal profits. This paper examines abnormal price performance associated with insider trading in the Hong Kong stock market. We find that abnormal profits associated with insider trading are all concentrated on small firms. Trading volume does matter in determining the magnitude of those abnormal profits. Our results show that insiders of mediumsized and large firms do not earn abnormal profits. Finally, it is found that outsiders who mimic the information of insider trades associated with medium-sized and large firms cannot earn abnormal profits.

any traders in futures markets believe in the predictive power of technical ' W e say that t, is a Martingale Difference if c I = XI-EIX, I I l-i l whtvr I,-I is the informalion set available at the time t-1. In [his sensr, the error terms c, form a srqurnw of U I Icorrelated random variables.

One form of confirmation bias is the tendency for people to ignore information that is inconsistent with their current beliefs. While confirmation bias is the subject of both analytical models and experiments in accounting and finance, its effect on market prices has not been studied due to limitations associated with traditional financial markets. In eleven real-money movie box office prediction markets, confirmation bias was induced in all traders via the explanation effect, i.e. a requirement to submit a box office forecast and an explanation prior to trading. When all traders are subject to confirmation bias, market prices do not accurately reflect new, value-relevant information. However, in comparable a set of seven real-money movie prediction markets that included both traders who have not been subject to explanation requirement and those who have, we find efficient incorporation of new information into market prices. This study extends our knowledge of the conditions under w...

The phenomenon of low-balling reported in the financial press involves downward biased projections of earnings by managers or analysts, thereby artificially lowering market expectations and creating a positive earnings surprise when actual earnings are announced. This study reports that the stock market does respond to such surprises relative to analysts' reported forecasts. Further, the proportion of insider buy-transactions in the period prior to the earnings forecast is significantly higher for the sample with high positive earnings surprise than for the control sample with zero forecast errors. The study cannot distinguish whether managers or analysts are the source of the low-balling and therefore makes no statement on the legality of such insider trades.

Increasing complexity of the functionalities and the resultant growth in number of gates integrated in a chip coupled with shrinking geometries and short cycle time requirements bring in several challenges into the design of present day VLSI chips. In this paper we present the challenges faced and the approaches successfully adopted in the design of a complex 2.5 million gate high bandwidth data acquisition and processing VLSI chip (a trace-receiver chip, code-named Drishti) in a deep sub-micron technology at Texas Instruments India. The very high design complexity arises due to the rich architecture of the trace-receiver chip, the aggressive timing and performance requirements and its large size. The trace-receiver chip is highly configurable and scalable, thereby catering to both low-end systems, which are cost sensitive, and high-end applications, which demand performance. We present the innovative approaches that were applied to address the challenges encountered in meeting the aggressive design goals (which include functionality, timing, testability, manufacturability, reliability, system issues etc) and to bring the product early to market. Efficient logical and physical partitioning, design reuse and DFT strategies are a few of the techniques that were applied in this design. We present these along with details on the various analyses carried out as part of the design, including signal-integrity, reliability and system-level analyses, which were very critical in ensuring design-closure.

This paper develops a conceptual and methodological framework for the analysis and measurement of economic resilience. The working definition of economic resilience adopted in this paper is the "nurtured" ability of an economy to recover from or adjust to the effects of adverse shocks to which it may be inherently exposed. This concept is used to provide an explanation as to why a number of inherently vulnerable countries have attained relatively high levels of GDP per capita. The paper also presents a tentative approach aimed at developing an index of economic resilience covering four aspects namely macroeconomic stability, microeconomic market efficiency, governance and social development.

Hypothesis of Market Efficiency is an important concept for the investors who wish to hold internationally diversified portfolios. With increased movement of investments across international boundaries owing to the integration of world economies, the understanding of efficiency of the emerging markets is also gaining greater importance. In this paper we test the weak form efficiency in the framework of random walk hypothesis for the two major equity markets in India for the period 1991 to 2006. The evidence suggests that the series do not follow random walk model and there is an evidence of autocorrelation in both markets rejecting the weak form efficiency hypothesis.

Keywords: Adaptive markets hypothesis Market efficiency Nonlinear tests US stock market UK stock market This paper empirically investigates the Adaptive Market Hypothesis (AMH) in three of the most established stock markets in the world; the US, UK and Japanese markets using very long run data. Daily data is divided into five-yearly subsamples and subjected to linear and nonlinear tests to determine how the independence of stock returns has behaved over time. Further, a five-type classification is proposed to distinguish the differing behaviour of stock returns. The results from the linear autocorrelation, runs and variance ratio tests reveal that each market shows evidence of being an adaptive market, with returns going through periods of independence and dependence. However, the results from the nonlinear tests show strong dependence for every subsample in each market, although the magnitude of dependence varies quite considerably. Thus the linear dependence of stock returns varies over time but nonlinear dependence is strong throughout. Our overall results suggest that the AMH provides a better description of the behaviour of stock returns than the Efficient Market Hypothesis.

There is considerable speculation about the correlation between investments in telecommunications and economic development. Mobile phones, by virtue of their role as carriers and conduits of information, ought to lessen the information asymmetries in markets, thereby making rural and undeveloped markets more efficient. This research tests this assumption using a case-study from India, where the fishing community in the south-western state of Kerala has adopted mobile phones in large numbers.

The purpose of this paper is to review the evidence on the profitability of technical analysis. The empirical literature is categorized into two groups, 'early' and 'modern' studies, according to the characteristics of testing procedures. Early studies indicate that technical trading strategies are profitable in foreign exchange markets and futures markets, but not in stock markets. Modern studies indicate that technical trading strategies consistently generate economic profits in a variety of speculative markets at least until the early 1990s. Among a total of 95 modern studies, 56 studies find positive results regarding technical trading strategies, 20 studies obtain negative results, and 19 studies indicate mixed results. Despite the positive evidence on the profitability of technical trading strategies, most empirical studies are subject to various problems in their testing procedures, e.g. data snooping, ex post selection of trading rules or search technologies, and difficulties in estimation of risk and transaction costs. Future research must address these deficiencies in testing in order to provide conclusive evidence on the profitability of technical trading strategies.

Viewing the detection of earnings management from the perspective of a crime scene investigator sheds new light on prior research on earnings management and its close relative, earnings quality. The works of Ball and Shivakumar [2008. Earnings quality at initial public offerings. Journal of Accounting and Economics, in press.] and Teoh et al. [1998. Earnings management and the subsequent market performance of initial public offerings. Journal of Finance 53, 1935-1974.] are used to illustrate the application of seven components of a crime scene investigation to earnings management research.

The paper provides a survey of the work that has been done in financial econometrics in the past decade. It proceeds by first establishing a set of stylized facts that are characteristics of financial series and then by detailing the range of techniques that have been developed to model series which possess these characteristics. Both univariate and multivariate models are considered.

This study addresses the question of whether the adaptive market hypothesis provides a better description of the behaviour of emerging stock market like India. We employed linear and nonlinear methods to evaluate the hypothesis empirically. The linear tests show a cyclical pattern in linear dependence suggesting that the Indian stock market switched between periods of efficiency and inefficiency. In contrast, the results from nonlinear tests reveal a strong evidence of nonlinearity in returns throughout the sample period with a sign of tapering magnitude of nonlinear dependence in the recent period. The findings suggest that Indian stock market is moving towards efficiency. The results provide additional insights on association between financial crises, foreign portfolio investments and inefficiency.

We investigate triangular arbitrage within the spot foreign exchange market using highfrequency executable prices. We show that triangular arbitrage opportunities do exist, but that most have short durations and small magnitudes. We find intra-day variations in the number and length of arbitrage opportunities, with larger numbers of opportunities with shorter mean durations occurring during more liquid hours. We demonstrate further that the number of arbitrage opportunities has decreased in recent years, implying a corresponding increase in pricing efficiency. Using trading simulations, we show that a trader would need to beat other market participants to an unfeasibly large proportion of arbitrage prices to profit from triangular arbitrage over a prolonged period of time. Our results suggest that the foreign exchange market is internally self-consistent and provide a limited verification of market efficiency.

In this paper we examine the long-run relationship between gold and oil spot and futures markets. We draw on the conceptual framework that when oil price rises, it creates inflationary pressures, which instigate investments in gold as a hedge against inflation. We test for the long-run relationship between gold and oil futures prices at different maturity and unravel evidence of cointegration. This implies that: (a) investors use the gold market as a hedge against inflation and (b) the oil market can be used to predict the gold market prices and vice versa, thus these two markets are jointly inefficient, at least for the sample period considered in this study. (P.K. Narayan). 1 There is one related strand of literature, which examines long memory property in the gold market and arbitrage in gold spot and futures options . The oil market has been analysed from various perspectives; for some recent analysis, see Hayat and Narayan , Narayan and Narayan , Narayan and Wong .

The few existing studies on equity price dynamics and market efficiency for Latin American emerging equity markets show conflicting results. This study uses multiple varianceratio and auto-regressive fractionally integrated moving-average tests and new data (U.S. dollar-based national equity indices for the 1987-1997 period) to clarify these results. Documented evidence shows that equity prices in major Latin American emerging equity markets-Argentina, Brazil, Chile and Mexico-follow a random walk, and that they are, generally, weak-form efficient. In sum, therefore, the evidence suggests that international investors in these markets cannot use historical information to design systematically profitable trading schemes because future long-term returns are not dependent on past returns.

An efficient market incorporates news into prices immediately and fully. Tests for efficiency in financial markets have been undermined by information leakage. We test for efficiency in sports betting markets-real-world markets where news breaks remarkably cleanly. Applying a novel identification to high-frequency data, we investigate the reaction of prices to goals scored on the "cusp" of half time. This strategy allows us to separate the market's response to major news (a goal), from its reaction to the continual flow of minor game-time news. On our evidence, prices update swiftly and fully.

A facsimile apparatus uses a single memory in a facsimile system and a printer system without using an interface between the two systems. In the facsimile apparatus, a FAX controller stores data received via a communication line. A recording control circuit fetches data from the memory via a data bus, and records an image based on the fetched data. A memory intervention circuit outputs a data bus selection signal, and switches an address of access to the recording medium and a connection of the data bus. Thus, a single memory is shared between a facsimile system and printer system.

In this paper, economic vulnerability is defined as the exposure of an economy to exogenous shocks, arising out of its inherent characteristics, typically associated with smallness, while economic resilience is the policy-induced ability of an economy to withstand or recover from the effects of adverse shocks. The paper briefly reviews the work already done on economic vulnerability and extends research work carried so far towards developing a conceptual and methodological framework for the definition and measurement of economic resilience. The measurement of economic resilience is carried out through the development of an index gauging the adequacy of policy in four broad areas , namely macroeconomic stability, microeconomic market efficiency, good governance and social development. The analysis of economic resilience explains how small economies can attain a relatively high level of GDP per capita if they adopt appropriate policy stances. In other words, the relatively good economic performance of a number of small states is not because, but in spite of, their small size and inherent economic vulnerability. The results of this study can be used as a tool towards the formulation of policies aimed at overcoming the adverse consequences of economic vulnerability.

This paper examines the profitability of trading strategies derived from stock rankings published in Investor's Business Daily. The best system provides market-adjusted abnormal monthly returns of 1.81% from buying S&P 500 stocks, and a 3.18% abnormal return on an arbitrage portfolio. Stocks selected for trading have above average volatility, but a portion of abnormal return may be a reward for identifying stocks with short-run sustainable price momentum. Results seem indicative of market inefficiency, but the phenomena may be temporary since abnormal returns are lower during the second half of the data set.

ABSTRACT
The responsiveness of the market financial instruments in terms of prices to reflect market information and the inability of information privileged market participant(s) to out-perform other counterparts pose the quest to test whether the strong form of market efficiency prevail in the Nigerian capital market or not. With the extraction of the returns on 240 stocks from the database of the Nigerian Stock Exchange (NSE), a comparison was made between a constructed random portfolio and a 3-year annualized average return on the portfolios of the mutual fund industry. In this empirical study, the analysis deduced that mutual funds were unable to out-perform the random portfolios created from the index stocks, which thus implies that the strong form of market efficiency holds in the Nigerian Capital Market. Nonetheless, profound analysis on stock volatility risk is essential to avoid substantial loss in the stock market.
Keywords: Market Efficiency, Capital Market, Nigerian Stock Exchange (NSE) Stocks, Information, Portfolio, Random Walk, Mutual Funds.

This paper uses recent experimental studies of financial accounting to illustrate our view of how such experiments can be conducted successfully. Rather than provide an exhaustive review of the literature, we focus on how particular examples illustrate successful use of experiments to determine how, when and (ultimately) why important features of financial accounting settings influence behavior. We first describe how changes in views of market efficiency, reliance on the experimentalist's comparative advantage, new theories, and a focus on key institutional features have allowed researchers to overcome the criticisms of earlier financial accounting experiments. We then describe how specific streams of experimental financial accounting research have addressed questions about financial communication between managers, auditors, information intermediaries, and investors, and indicate how future research can extend those streams. We focus particularly on (1) how managers and auditors report information; (2) how users of financial information interpret those reports; (3) how individual decisions affect market behavior; and (4) how strategic interactions between information reporters and users can affect market outcomes. Our examples include and integrate experiments that fall into both the ''behavioral'' and ''experimental economics'' literatures in accounting. Finally, we discuss how experiments can be designed to be both effective and efficient. #

The OTC derivatives markets all over the world have shown tremendous growth inrecent years. In the wake of the present financial crisis, which is believed to have beenexacerbated by OTC derivatives, increasing attention is being paid to analysing theregulatory environment of these markets. In this context, we analyse the regulatoryframework of the OTC derivatives market in India. The paper, inter alia, seeks toprove the point that the Indian OTC derivatives markets, unlike many otherjurisdictions, are well regulated. Only contracts where one party to the contract is anRBI regulated entity are considered legally valid in India. A good reporting systemand a post-trade clearing and settlement system, through a centralised counter party,has ensured good surveillance of the systemic risks in the Indian OTC market.From amongst the various OTC derivatives markets permitted in India, interest rateswaps and foreign currency forwards are the two prominent markets. However, byinternational standards, the total size of the Indian OTC derivatives markets stillremains small because credit default swaps were conspicuously absent in India untilnow. It appears that Indian OTC derivatives markets will grow fast once again afterthe present financial crisis is over. This research paper explores those open issues thatare important to ensure market stability and development. On the issue of the muchdiscussed competition between exchange-traded and OTC-traded derivatives, webelieve that the two markets serve different purposes and would contribute more torisk management and market efficiency, if viewed as complementary. Regarding theintroduction of new derivative products for credit risk transfer, the recentannouncement by the RBI that it would introduce credit default swaps is a welcomesign. We believe that routing of credit default swaps through a reporting platform andmanaging its post-trade activities through a centralised counterparty would providebetter surveillance of the market. Strengthening the position of the ClearingCorporation of India Ltd. (CCIL) as the only centralised counterparty for Indian OTCderivatives market and better supervision of the off-balance sheet business offinancial institutions are two measures that have been proposed to ensure the stabilityof the market.

The Momentum effect is a capital market puzzle. International evidence has found anomalies that market efficiency-based explanations have been so far unable to explain. If it is pervasive, the Momentum effect should be present in the Chilean market as well. From the perspective of the existing literature, this is an out-of-sample test of the effect and thus constitutes our main motivation. This paper mainly follows the methodology proposed by Jegadeesh and Titman (1993, 2001) and finds a strong presence of the momentum effect. Ignoring transaction costs, trading strategies consisting of buying past winners and selling past losers, earn significant abnormal returns in the period July 1991 - September 2008. We also study possible empirical regularities in this behavior, finding non discernible patterns in performance. Nonetheless, such patterns arise in terms of persistence: aggregate economic shocks affect the profit levels from a Momentum-based strategy but do not affect its statistically significant presence throughout the business cycle.

A well-documented anomaly in racetrack betting is that the expected return per dollar bet on a horse increases with the probability of the horse winning. This socalled "favorite-longshot bias" is at odds with the presumptions of market efficiency. We offer a new solution to this much-debated puzzle which is related to another famous anomaly. We show that the bias can be explained by the same behavioral assumption that underlies the well-known "winner's curse" in common value auctions.

Market Efficiency has been a subject of main debate of traditional finance for a long period of time. It emphasizes that security prices are rationally connected to many logical and psychological realities and always incorporate all the information available to the market. In this way, security markets are seen as efficient in reflecting information about individual stocks or about the stock market as a whole. Market efficiency is in essence an extension of the zero profit competitive equilibrium condition from the certainty world of classical price theory to the dynamic behavior of prices in speculative markets under conditions of uncertainty. Risk and return is the core part in investment decision making process. Risk-return tradeoff is the meaningful deciding point; this can be computed with the help of capital asset pricing model. It is the best tool to measure risk and return content involved in the stocks. In this study risk and return is calculated by using CAPM and attempts made to test the relationship between risk and return is linear. Beta and necessary statistics models have been used for testing the hypothesis framed for this study. This study evidence there is no strong efficiency found in the Indian market.

Forecasting methods are routinely employed to predict the outcome of competitive events (CEs) and to shed light on the factors that influence participants’ winning prospects (e.g., in sports events, political elections). Combining statistical models’ forecasts, shown to be highly successful in other settings, has been neglected in CE prediction. Two particular difficulties arise when developing model-based composite forecasts of CE

An organization has two essential elements that form the overall worth of that organization, that is it’s the equity and debt. For business executives to expose their entities to public ownership, there is the need to sell out ownership of parts of these entities, in the form of shares/ stocks and/or bonds, to generate revenue for the operation of the business. The question therefore is; how can businesses get these stocks and bonds out there for public patronage? This is where the capital market comes in.
Capital market is structured to serve as a platform for the sales and purchase of stocks and bonds. Diverse speculations and intellectual theories have been formulated around capital market, among which one of the most notable one was the Efficient Market Hypothesis (EMH), propounded by Eugene Fama in the 1960s. Concisely, the EMH ascertains that all information for sellers and purchasers of stocks are available in the prices of the stocks/ securities, hence, the exceptional performance of a security exclusively attributed to the investor is purely based on chance and not skill. This paper analyzes the Market efficiency theories and concepts.