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The Efficient Market Hypothesis

Chapter 11

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Random Walks and The Efficient Market Hypothesis

•Random Walks : The theory that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.

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Random Walks and The Efficient Market Hypothesis

•The Efficient Market Hypothesis: An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. 

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Random Walks and The Efficient Market Hypothesis•Competition as the source of efficiency•Versions of the efficient market

hypothesis•Weak form EMH•Semi strong EMH•Strong form EMH

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Implication of the EMH

•Technical analysis•Fundamental analysis•Active versus passive portfolio management

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Implication of the EMH•Technical analysis: A method

of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.

•Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

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Implication of the EMH

• Fundamental analysis : A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors.

• Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors and individually specific factors.

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Implication of the EMH

•Active versus passive portfolio management•Active asset management is based on a

belief that a specific style of management or analysis can produce returns that beat the market

•Passive asset management is based on the belief that: Markets are efficient, Market returns, cannot be surpassed regularly over time, Low-cost investments held for the long-term will provide the best returns.

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Event studies

•An empirical study performed on a security that has experienced a significant catalyst occurrence, and has subsequently changed dramatically in value as a result of that catalyst. The event can have either a positive or negative effect on the value of the security.

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Studi Empirik Event Study di Indonesia• Pengaruh pengumuman merger dan akuisisi (Anggraini

Kurniawan, 2001)• Analisa pengaruh lebaran sebagai bentuk anomali pada

pasar saham di bursa efek jakarta (event study peristiwa lebaran tahun 2001, Dwi Nur Indahsari, 2002)

• Reaksi pasar modal indonesia terhadap peristiwa politik dalam negeri (event study : peristiwa pelantikan Megawati Soekarnoputri sebagai Presiden RI ke-5) (Elizabeth Alim, 2002)

• Pengaruh pengumuman right issue terhadap kinerja perusahaan dan abnormal return serta volume perdagangan saham (event study terhadap-perusahaan manufaktur yang listing di Bursa Efek Jakarta (Daniel Wibisono, 2003)

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Studi Empirik Event Study di Indonesia• Reaksi pasar terhadap publikasi laporan keuangan

(event study pada perusahaan non manufaktur yang terdaftar di BEJ tahun 2004-2006 (Siswojo, Ivana M, 2007)

• Reaksi pasar terhadap publikasi laporan keuangan (event study pada perusahaan manufaktur yang terdaftar di BEJ tahun 2004-2006) (Thedja, Caroline, 2007)

• Analisa perbedaan abnormal return dan trading volume activity sebelum dan sesudah pemilu 1999 dan 2004 (analisa pada emitmen yang tergolong lq-45 pada periode 1999 dan 2004) (Wibowo, Nur Cahyo, 2009)

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Studi Empirik Event Study di Indonesia• Analisis January effect pada IHSG, indeks

LQ45, dan saham individual (studi kasus terhadap 34 saham yang diperdagangkan periode 1997-2002 (Fitriani, Alexandra, 2003)

• Analisis terjadinya january effect dan pengaruhnya terhadap return obligasi korporasi di bursa efek Surabaya tahun 2003 (Caroline, Nesia, 2005)

• Pengujian day-of-the-week effect pada bursa efek Jakarta periode 1 Juli 1997-31 Juli 1998 (Helen, 1999)

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Are market Efficient ?

•The issues▫The magnitude issue▫The selection bias issue▫The lucky event issue

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Weak form tests: Patterns in stock returns•Returns over short horizons•Returns over long horizons

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Semi strong tests: Market anomalies

•The small firm in January effects•The neglected firm effect and liquidity effect

•Book to market ratios•Post-earnings announcements price drift

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Semi strong tests: Market anomalies

•The small firm in January effects

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Semi strong tests: Market anomalies

•The neglected firm effect and liquidity effect•Neglected firms are usually the smaller firms

that analysts tend to ignore. • Information available on these smaller

companies tends to be limited to those items that are required by law, such as the 10-K. Blue-chip firms, on the other hand, have a higher profile, which provides large amounts of high quality information (to institutional investors such as pension or mutual fund companies.

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Semi strong tests: Market anomalies

•Book to market ratios

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Semi strong tests: Market anomalies

•Post-earnings announcements price drift

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Semi strong tests: Market anomalies

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Strong form tests:

•Inside information•Interpreting the evidence•Mutual fund and analyst performance Risk premiums or inefficiencies

•Anomalies or data mining

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Strong form tests:

•Inside information•Interpreting the evidence•Mutual fund and analyst performance Risk premiums or inefficiencies

•Anomalies or data mining

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Strong form tests:

•Inside information•Interpreting the evidence

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Strong form tests:

•Mutual fund and analyst performance Risk premiums or inefficiencies

•Anomalies or data mining

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The Noisy market hypothesis and fundamental indexing

• Noisy Market Hypothesis contrasts the efficient market hypothesis in that it claims that the prices of securities are not always the best estimate of the true underlying value of the firm. It argues that prices can be influenced by speculators and momentum traders, as well as by insiders and institutions that often buy and sell stocks for reasons unrelated to fundamental value, such as for diversification, liquidity and taxes

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The Noisy market hypothesis and fundamental indexing

•Fundamentally based indexes are indices in which stocks are weighted by one of many economic fundamental factors, especially accounting figures which are commonly used when performing corporate valuation, or by a composite of several fundamental factors

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Mutual fund and analyst performance

•Stock market analyst

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Mutual fund and analyst performance

•Mutual Fund Managers

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Mutual fund and analyst performance

•Mutual Fund Managers

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Mutual fund and analyst performance•Stock market analyst

•Survivorship bias in mutual fund studies▫The managers who perform well in one period tend

to be above average performers in subsequent periods

▫Empirical studies: 600 managers in mutual fund company (Tab 11.2)

First Period Second Period

Winners Losers

Winners 0.25 0.25

Losers 0.25 0.25

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Mutual fund and analyst performance

•So, are markets efficient?▫Markets are very efficient, but that

rewards to the especially diligent, intelligent, or creative may in fact be waiting

▫ (Pasar sangat efisien, tetapi imbalan masih tetap menunggu bagi mereka yang paling rajin, cerdas atau kreatif )

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Tugas KelompokKlp RDPU RDPT RDC RDS Felix Mandiri Investa

PU Fortis Prima II Fortis Pesona Schroder Dana

Prestasi Plus

Venny Schroder Dana Likuid

Schroder Dana Obl Ekstra

Panin Dana Unggulan

Panin Dana Maxima

Timothy Manulife DK Manulife Obl Ngr Fortis Ekuitra Manulife Saham Andalan

Hilda Mandiri Investa PU

Mandiri Investa DU

Mandiri Investa Aktif

Mandiri Investa Atraktif

Mathew Mandiri Investa PU

Fortis rUPIAH Plus II

Panin Dana Unggulan

Schroder Dana Prestasi Plus

Ivana Manulife DanaPasar Uang

Manulife Pendapatan Tetap

Manulife Dana Berimbang

Manulife Dana Ekuitas

Gentry Batavia Dana Kas Maxima

Manulife Obl Neg Indonesia

Manulife Dana Bertumbuh Berimbang

Panin Dana Prima

Danny Manulife Dana Kas

Manulife Obl Unggulan

Manulife Dan Stabil Berimb

Manulife Dana Saham

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Reksadana Manulife• Manulife Dana Pasar Uang• Manulife Dana Pasar Uang Syariah• Manulife Pendapatan Tetap Dollar (Rp) • Manulife Pendapatan Tetap Dollar (USD) • Manulife Dana Ekuitas • Manulife Dana Ekuitas Syariah • Manulife Dana Berimbang Syariah • Manulife Dana Berimbang • Manulife Pendapatan Tetap Korporasi • Manulife Pendapatan Tetap Negara• Manulife Dana Ekuitas Indonesia - China (Rp) • Manulife Dana Ekuitas Indonesia - China (USD)

• Fund Fact Sheet• http://www.manulife-indonesia.com/Front/FFS.ht

m

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