2. How can we forcast price of share?
• Fundamental Analysis
• Technical Analysis
• Market price of the share is not only dependent on demand and supply
but several other factors – can be termed as INFORMATION.
• The perceptual inferences of all information available in the market, if
quantified accurately should help in predicting the expected price of the
securities.
• This has been advocated thro’ informal market efficiency theory.
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Khushbu
Savaliya
3. History
• Developed by Professor Eugene Famaat the University of Chicago
Booth School of Business.
• The efficient-market hypothesis was first expressed by Louis
Bachelier, a French mathematician, in his 1900 thesis, "The
Theory of Speculation".
• The efficient-market hypothesis emerged as a prominent theory in
the mid-1960s. Paul Samuelson had begun to circulate Bachelier's
work among economists.
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Khushbu
4. Why Efficient Market Hypothesis?
• To test the form of market – extent of efficiency.
• To make sure that one can accurately forecast the
market, discover the market trend and help investors to
make critical decisions.
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Khushbu
Savaliya
5. What is Efficient Market?
• Market where all relevant information is
available to all participants at the same time,
and where prices respond immediately to
available information.
• Stock markets are considered the best
examples of efficient markets
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Khushbu
Savaliya
6. Efficient Market Hypothesis
• The efficient-market hypothesis (EMH) is a theory
in financial economics that states that asset prices fully
reflect all available information.
• A direct implication is that it is impossible to "beat the
market" consistently on a risk-adjusted basis since market
prices should only react to new information.
• Securities prices always fully reflect all available,
relevant information about the security.
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Khushbu
Savaliya
7. Miss Conception About EMH
• Market has perfect forecasting ability
• Price tend to fluctuate they would not reflect the fair value
• Inability of institute portfolio managers to achieve superior
investment performance
• The random movement of stock price suggest that the stock market
is irrational
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By: Prof.
Khushbu
Savaliya
8. Random Walk Theory
• The random walk hypothesis is a financial theory stating that stock market prices
evolve according to a random walk and thus cannot be predicted.
• It is consistent with the efficient-market hypothesis.
• Its based on following assumption
• Information is freely and instantaneously available to all market participant
• Price change only in response to new information
• Since new information can not be predicted in advance, price can not be
forecast, hence price behave like random walk.
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Khushbu
Savaliya
9. Much empirical research has been done to
examine how much (or how fully) information
is incorporated in market prices.
• Questions about the extent of the information
incorporated has led to several terms to describe the
degree of efficiency exhibited in a particular market.
• Three level of market efficiency
• The three terms are “weak form efficient,” “semi-strong
form efficient,” and “strong form efficient.”
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By: Prof.
Khushbu
Savaliya
10. 1. The weak form efficiency markets hypothesis
a definition, and some evidence
• The weak form hypothesis said that price reflect all
information found in the record of past price and volumes
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By: Prof.
Khushbu
Savaliya
11. Weak form evidence
• Studies show that systems that try to predict the future
course of stock prices based upon some rule derived
from the history (past days, weeks, or months) of past
stock price changes do not make profit greater than a
simple buy and hold strategy.
• Statistical analysis of successive stock price changes
reveals that the correlation between price changes is
approximately zero.
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Khushbu
Savaliya
12. If a market is weak form efficient,
then technical analysis should
not be effective in picking stocks
for above average profits.
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By: Prof.
Khushbu
Savaliya
13. 2. The semi-strong form efficiency markets hypothesis - a
definition and some evidence
• The semi-strong form efficient markets hypothesis
maintains that price reflect not only all information found
in the record of past price and volumes but also all
publicly available information is incorporated in stock
prices.
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By: Prof.
Khushbu
Savaliya
14. Semi-strong form evidence:
• Studies show that public announcements of earnings,
dividends, stock splits, etc. cause stock prices to
immediately change to reflect the new information.
• Studies show that mutual funds (whose professional
managers would be expected to have access to the very
best information available) do not consistently
outperform the average market indexes.
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By: Prof.
Khushbu
Savaliya
16. If a market is semi-strong
efficient, then picking stocks
based on publicly available
information, should not yield
profits greater than what could
be obtained using a simple buy
and hold strategy.
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By: Prof.
Khushbu
Savaliya
17. 3. The strong form of the efficient markets
hypothesis - a definition and some evidence
• The strong form of the hypothesis maintains that price
reflect all available information obtainable from any
source whatever, is incorporated in market prices.
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Khushbu
Savaliya
18. Strong form evidence:
• Studies show that “inside information” available to
corporate insiders or market specialists could be used to
earn above average trading profits
• Yet, remember that using inside information is illegal!.
Thus, strong form inefficient markets may not be legally
exploited to earn greater than average profits, either.
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Khushbu
Savaliya
20. Finally, it should be noted that
there is some evidence that
contradicts the hypothesis.
• Some market studies give evidence that a
strategy as simple as buying low P/E ratio
stocks can result in above average profit.
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By: Prof.
Khushbu
Savaliya
21. The efficient market hypothesis
has not been “proven,” however,
it is a highly regarded tenant in
modern finance.
• If markets are efficient, investors can expect that prices
are “fair,” and that the rate of return earned from a
diversified portfolio of securities over time will be
approximately average for that class of securities.
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Khushbu
Savaliya
22. Conclusion
• There is evidence that markets are weak form and semi-
strong form efficient, but probably not strong form
efficient.
• Yet it must be noted that the tests of efficiency have
largely focused on well developed markets in the United
States. Foreign markets have been studied less
extensively, and may exhibit less efficiency.
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Khushbu
Savaliya
