WEAK FORM MARKET

EFFICIENCY:

(EVIDENCE FROM EMERGING &

DEVELOPED WORLD)

Technical and fundamental analysis cannot predict the future prices of securities (Malkiel, 2003).

WEAK FORM MARKET EFFICIENCY

Introduction

Capital market has function of channelizing savings into investment

(Sudhahar and Raja, 2010)

Securities in the market are to be appropriately

priced

In M.E-Stock prices fully

reflect all the available

information

In M.E old information can't be used to prefigure future price movements (Vaidyanathan and Gali, 1994)

• In efficient capital markets, the role of regulatory authorities is limited as securities are accurately priced

• In an inefficient market, an investor will be better off trying to spot winners and losers in the market (Rutterford, 1993)

WEAK FORM MARKET EFFICIENCY

FAMA proposed three types of stock market efficiency

Weak Form Efficiency

Semi Strong Form Efficiency

Strong Form Efficiency

All assets will be correctly priced in the market offering optimal reward to risk. (Gupta and Basu, 2007)

Literature Review - 32 Researches But With Contradictory ResultData Used

Time period 2007-10 of developed (uk, usa & Germany) & Emerging Markets (BRICS)

Collection of Daily prices

Calculation of daily Return

Proxies

WEAK FORM MARKET EFFICIENCY

Markets Under Consideration

BOVESPA of BrazilSensex of India,

Shanghai Index of China,KOSPI Index of South Korea,

RTS of Russia,

NASDAQ Composite of US,DAX of Germany and

FTSE 100 of UK

Methodology

Unit root testRandom Walk Hypothesis

Stationarity

First difference

H0 p = 0H1 p < 0 The acceptance of null hypothesis, shows non- stationary

The rejection of null hypothesis shows stationary

WEAK FORM MARKET EFFICIENCY

GARCH in Finance• Financial returns series often clearly exhibit

conditional heteroskedasticity (volatility clustering)

• Goal of GARCH models is to provide a volatility measure

Log Returns of S&P 500: Jan 02 - Dec 04

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

Conditional heteroskedasticity:

Future values cannot be predicted

Auto Correlation

Volatility Cluster

WEAK FORM MARKET EFFICIENCY

Generalized Auto Regressive Conditional Heteroskedasticity (GARCH) Process

null hypothesis of unit root (non-stationarity)

is rejected, as the value of test statistic is

more negative than the critical value in

each country

value of (a +b ) is very close to 1 for all capital

markets, suggesting thereby a high

persistence of volatility clusters

Reason

• most recent global financial recession• underlying credit and confident crises

WEAK FORM MARKET EFFICIENCY

Empirical Analysis - Results

Issues with Inefficiency

Outperforming the market

Deteriorating the gross savings

Low true values may give a lot of capital,

High true values may find it difficult to raise capital

Funds are not channeled where they are most useful

WEAK FORM MARKET EFFICIENCY

Findings Motivate the Policy Makers to take steps, to

regulate the information properly impetus for successful financial innovation by

financial firms thereby making the market move towards efficiency in the long run.

WEAK FORM MARKET EFFICIENCY