Adaptive Market Hypothesis 2

8/13/2019 Adaptive Market Hypothesis 2

1/33

Adaptive Market Hypothesis:

A case on National Stock

Exchange ( NSE)


2/33


3/33

Contd

Equity Market:

The market in which shares are issued and traded

through exchanges or O.T.C

NiFTY:

NSE of Indias benchmark index for indian equity

market.


4/33

Introduction

The adaptive market hypothesis, as proposed

by Andrew Lo is an attempt to reconcile

economic theories based on the efficient markethypothesis (which implies that markets are

efficient) with behavioral economics, by applying

the principles of evolution to financial

interactions: competition, adoption and natural

selection.


5/33

Efficient Market Hypothesis

Efficient Market Hypothesis (EMH) states that security

prices fully reflect all available information.

The degree to which stock prices reflect all available,

relevant information.


6/33

Contd

Market Efficiency:

Developed in 1970

Economist Eugene Fama

Stated that it is not possible for an investor to

outperform the market because all available

information is already built into all stock prices


7/33

Forms of EMH

Weak form

Semi strong form

Strong form


8/33

Weak Form

The weak form of EMH states that the current

prices fully reflect the information implied by the

past prices.

In weak-form efficiency, future prices cannot be

predicted.

This form has been designated as the random walkhypothesis (RWH).


9/33

Tests of Weak Form

Serial correlation tests

Runs tests


10/33

Random walk hypothesis

The random walk hypothesis is a financial

theory stating that stock market prices evolveaccording to a random walk and thus the prices

of the stock market cannot be predicted.


11/33

Semi-Strong Form

The semi - strong form of the EMH states that

the current stock prices reflect all publicly

available information and the stock prices

adjust rapidly to new information


12/33

Strong Form

strong-form efficiency, share prices reflect allinformation, public and private, and no one

can earn excess returns


13/33

Objective of the study

To develop an understanding of the variousforms of efficiency of the stock market.

To trace the trend of the movement of the stockmarket index over the study period.

To test whether the Indian Equity markets,especially NSE is weak form efficient or not.

To test whether the Indian Equity markets,especially NSE is semi-strong form efficient or

not.


14/33

Scope of the study

Testing the efficiency of the market is very

important for the investors, stock brokers,

financial institutions, government etc. for

understanding the functioning of the capitalmarkets.

Stock market movement gives an idea to the

investors for buying and selling shares in order toearn some profits


15/33

Tools for Analysis

Runs test

Autocorrelation test Event study


16/33

Runs Test

Non-parametric statistical test

Used to test the hypothesis Based on the null hypothesis

Two elements + and -


17/33

Contd

E(r) = 2n1n2 / (n1+ n+12 )

WhereE(r) = Expected number f runs

n1 = number of positive runs

n2 = number of negative runs


18/33

Contd

S.E = 2n1n2 (2n1n2-n1-n2) / (n1+n2)2 (n1+n2-1)

Where

S.E = Standard Error

The expected number of runs compared with the

actual number of runs.


19/33

Contd

R + 0.5E (r)

Z = -----------------

S.E

Where Z = standardized value

R = Actual numbers of runs

0.5 = Continuity adjustment

E(r) = Expected number f runs S.E = Standard Error


20/33

Contd

The null hypothesis is rejected

if the calculated number of runs falls outside the

95% confidence interval

(-1.96 s = k = + 1.96 s).

The null hypothesis is acceptedif the value lies in between 1.96.


21/33

Rejection Region for Two-Tailed Z Test (H1:

0) with =0.05The decision rule is: Reject H0if Z < -1.960 or if Z > 1.960.


22/33

Serial Correlation tests

The relationship between a given variable and

itself over various time intervals.

serial correlation is used by technical analysts to

determine how well the past price of a security

predicts the future price.


23/33

Event Study

Semi-strong form of efficiency has

been tested by event study.


24/33

Contd

Daily Returns:


25/33

Contd

Security Returns Variability (SRV):


26/33

Contd

Average Security Returns Variability:


27/33

Contd

Average Abnormal Returns:


28/33

Contd

Cumulative Abnormal Returns (CAR):


29/33

Contd

T-Test:


30/33

Analysis

Weak Form

Indices of NSE are efficient

Previous indices value are effectively absorbed bytodays indices

Investors who follow technical analysis will not b able

to earn a return

This indicates that the component stocks efficient


31/33

Contd

Semi-Strong Form

Steps

Collect a sample of firms

Determined the prices

Define the period studied

Compute the daily Returns,

Abnormal return,Average Abnormal return,

Cumulative Abnormal Return


32/33

Contd

Markets are not efficient

Abnormal Returns high Prices have been fluctuated

Fundamental analysis can beat the market


33/33

Conclusion

Based on the result of runs test and auto

correlation test nullhypothesis is rejected.It is proved that Indian equity market follow

random walk modal and is a weak formefficient.

Indian stock market with respect to stock split,

dividend and bonus announcement by

companies using event study and analysis

proves that markets are not efficient in semi-

strong form

Adaptive Market Hypothesis 2

Documents

Transcript of Adaptive Market Hypothesis 2