Efficient market hypothesis

1. By
Guru Dayal Kumar
MA Economics
Central University of South Bihar
Email-gurudayal1996@gmail.com

2. 1. An efficient market is one in which these are
large number of profit hungry investors, who are
actively and independently carried out stock
research such that
 Current stock price reflects all available
information
 New informers come to the market on random
basis and affect stock price instantly_.Hence in
such a market nobody can make super normal
profit.

3. 2. FAMA advocated there level of market
efficiency
 Strong form
 Semi strong form
 Weak form

4.  Weak form-current stock price reflects all stock
market information i.e. (price and volume) so
technical analysis is useless.
 Semi strong- Current stock price reflects all
publically available information, hence both
fundamental analysis & technical analysis are
Useless.
 Strong form- Current stock price reflects both
publically available information as well as
insider information's ( even insider trading is
not possible).

5. A. Weak form
 Run test
 Autocorrelation test
 Serial correlation test
B. Semi strong form
 Run test

6. Day Market Price
1 220
2 225 +1
3 235 +1
4 210 -2
5 205 -2
6 215 +3
7 200 -4
8 220 +5
9 225 +5
10 230 +5
11 220 -6
12 250 +7
13 240 -8
14 245 +9
15 250 +9
16 260 +9
17 265 +9
18 268 +9
19 260 -10
20 250 -10

7. Plus(+)= 12
Minus(-)=7
Run (r)=10
This test focuses on direction of change in the price
not in the magnitude of change. A price rise/fall
represented by a +/-.

8.  A run refer to a series a price change in the
same direction. We introduce the following
standard notations.
 n1 = no of plus
 n2 = no of minus
 r= 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑟𝑢𝑛𝑠

9.  For market,
 To the efficient 𝑟 should lie close to the
Mean(𝜇) .
 For this purpose we create the range
 lower limit (L)= 𝜇 − (𝑡 ∗ 𝜎)……………(i)
 Upper limit (U)= 𝜇 + (𝑡 ∗ 𝜎)……………(ii)

10.  Average Runs (𝜇) is calculated as
 𝜇 =
2𝑛1𝑛2
𝑛1+𝑛2
+1………………………….(iii)
 Standard deviation (𝜎)is calculated as under
 𝜎 =…
(𝜇−1)∗(𝜇−2)
𝑛1+𝑛2−1
……………………..(iv)

11.  n1= 12
 n2= 7
 𝑟 = 10
 From equation (iii),
 𝜇 = 9.84
 From Equation(iv),
 𝜎 = 1.962

12. The value of “t” depends upon two things
 Level of significance (Given, approx =5%)
 Degrees of freedom, dof = n1+n2+-1
In this example dof = 12+7-1 = 18
 Refer “t” distribution table at
18 dof & 5% level of significance
Hence the value of “t”= 2.10 L

13. From the equation (i)
Lower limit = 5.72
From equation (ii)
Upper limit = 13.96
Yes, market is weak form efficiency.
Since, Actual runs(10) within the limit,
Hence the market is weak form efficiency.

14. Thank You