WELCOME TO

OUR
PRESENTATION
Our presentation
on
Efficient Capital Markets
By
Name

ID

Batch

Md. Ashikollah

51427032

27th

Mohiuddin Mohammed Abdul Ahad

51427070

27th

A.B.M Salahuddin

51324067

24th

Efficient Capital Market

Two forms of market efficiency
Informational efficiency the subject of this chapter
Transactional efficiency minimize cost
Economies of scale
Economies of scope

In an efficient capital market, security prices

Reflect all available information
Adjust rapidly to the arrival of new information.

Whether markets are efficient has been extensively

researched and remains controversial

Why Should Capital Markets

Be Efficient?
A large number of competing profit-maximizing participants
analyze and value securities, each independently of the others
New information regarding securities comes to the market in
a random fashion
Profit-maximizing investors rapidly adjust (in an unbiased
fashion) security prices to reflect the impact of new
information

Finally, In an efficient market, the expected returns

embedded in the current price of a security should
accurately reflect its risk

Efficient Market Hypotheses (EMH)

Basically, Efficient market hypothesis of investment gives the
idea that the market cannot be beaten as it incorporates all
important determinative information into current share prices.
Stocks trade at the fairest.
To gain higher returns, investments is made through purely
speculative that pose substantial risk.
Efficient Market Hypothesis (EMH) is divided into three subhypotheses depending on the information set involved
Weak-form efficient
Semi-strong form efficient
Strong-form efficient

Weak-Form EMH
The weak-form EMH implies that the market is
efficient, reflecting all market information. This
hypothesis assumes that the rates of return on the
market should be independent; past rates of return
have no effect on future rates.
Given this assumption, rules such as the ones
traders use to buy or sell a stock, are invalid.

Weak Form Tests

Statistical Tests for Independence - the tests used to
examine the weak form of the EMH test for the independence
assumption. Examples of these tests are the autocorrelation
tests (returns are not significantly correlated over time) and
runs tests (stock price changes are independent over time).
Trading Tests - The rules that traders follow are invalid. An
example of a trading test would be the filter rule, which
shows that after transaction costs, an investor cannot earn an
abnormal return.

Semistrong-Form EMH
The semi-strong form EMH implies that the market is
efficient, reflecting all publicly available information.
It assumes that stocks adjust quickly to absorb new
information and also incorporates the weak-form hypothesis.
Investors purchase stocks after this information is released,
they cannot benefit over and above the market by trading on
new
information.

Semi-strong Form Tests

Event Tests-An event test analyzes the security both before
and after an event, such as earnings. The idea behind the event
test is that an investor will not be able to bring in an above
average return by trading on an event.
Regression/Time Series Tests -Remember that a time series
forecasts returns based historical data. As a result, an investor
should not be able to achieve an abnormal return using this
method.

Strong-Form EMH
Stock prices fully reflect all information from
public and private sources
This implies that no group of investors
should be able to consistently derive aboveaverage risk-adjusted rates of return
This assumes perfect markets in which all
information is cost-free and available to
everyone at the same time

Strong-Form Tests
Given that the strong-form implies that the market is reflective
of all information, both public and private, the tests for the
strong-form center around groups of investors with excess
information. These investors are as follows:
Insiders
Exchange Specialists
Analysts
Institutional money managers

Insiders - Insiders to a company, such as senior managers,

have access to inside information. SEC regulations forbid
insiders for using this information to achieve abnormal returns.
Exchange Specialists - An exchange specialist recalls runs on
the orders for a specific equity. It has been found however, that
exchange specialists can achieve above average returns with
this specific order information.

Analysts - The equity analyst has been an interesting

test. It analyzes whether an analyst's opinion can help
an investor achieve above average returns. Analysts do
typically cause movements in the equities they focus
on.
Institutional money managers - Institutional money
managers, working for mutual funds, pensions and
other types of institutional accounts, have been found to
have typically not perform above the overall market
benchmark on a consistent basis.

Behavioral Finance
It is concerned with the analysis of various
psychological traits of individuals and how these
traits affect the manner in which they act as
investors, analysts, and portfolio managers
It is a relatively new field that seeks to combine
behavioral and cognitive psychological theory
with conventional economics and finance to
provide explanations for why people make
irrational financial decision.

Implications of
Efficient Capital Markets
Capital markets are efficient as related to
numerous sets of information that rapidly
adjust the stock prices.
There are substantial instances where the
market fails to rapidly adjust to public
information

Efficient Markets
and Technical Analysis
Assumptions of technical analysis directly
oppose the notion of efficient markets
Technicians believe that new information is
not immediately available to everyone, but
disseminated
from
the
informed
professional first to the aggressive investing
public and then to the masses

Efficient Markets
and Technical Analysis
Technicians also believe that investors do not
analyze information and act immediately - it
takes time
Therefore, stock prices move to a new
equilibrium after the release of new information
in a gradual manner, causing trends in stock
price movements that continue for periods

Efficient Markets
and Technical Analysis
Technical analysts develop systems to detect
movement to a new equilibrium (breakout) and
trade based on that
Which Contradicts rapid price adjustments
indicated by the EMH.
If the capital market is weak-form efficient, a
trading system that depends on past trading data
can have no value.

Efficient Markets
and Fundamental Analysis
Fundamental analysts believe that there is a
basic intrinsic value for the aggregate stock
market, various industries, or individual
securities and these values depend on underlying
economic factors
Investors should determine the intrinsic value of
an investment at a point in time and compare it
to the market price

Efficient Markets
and Fundamental Analysis
By doing a superior job of estimating intrinsic value,
superior market timing decisions can be made and
generated above-average returns.
This involves1.Aggregate market analysis,
2.Industry analysis,
3.Company analysis, and
4.Portfolio management

Aggregate Market Analysis

with Efficient Capital Markets
EMH implies that examining only past economic
events is not likely to lead to outperforming a buyand-hold policy because the market adjusts rapidly
to known economic events
Merely using historical data to estimate future
values is not sufficient
So we must estimate the relevant variables that
cause long-run movements

Industry and Company Analysis

with Efficient Capital Markets
Wide distribution of returns from different
industries and companies justifies industry
and company analysis
We must understand the variables that effect
rates of return and do a superior job of
estimating future values of these relevant
valuation variables, not just look at past data

Efficient Markets
and Portfolio Management
Portfolio Managers with Superior Analysts:
Concentrate efforts in mid-cap stocks that do
not receive the attention given by institutional
portfolio managers to the top-tier stocks.
The market for these neglected stocks may be
less efficient than the market for large wellknown stocks

Efficient Markets
and Portfolio Management
Portfolio Managers without Superior
Analysts
Determine and quantify client's risk preferences
Construct the appropriate portfolio
Diversify completely on a global basis to
eliminate all unsystematic risk
Maintain the desired risk level by rebalancing
the portfolio whenever necessary
Minimize total transaction costs

Any Question?

Thank You