Study In Market Efficiency

Market efficiency has been the most important and dissentious theory in financial field since it was addressed 40 years ago, which resulted from not only it has been the root of most financial theories, especially theory of securities analysis, but also it has made acceptation to some securities pricing theory and financial decision making theory clearly and easily by statement of the characteristic of stock markets. Unfortunately, some disagreements continue to stimulate both insight and controversy, since it was addressed in 1980's and stands in contradiction to the Efficient Market Hypothesis (EMH). This thesis focused on the theoretical study and empirical test in market efficiency, addressed Leakage and Inleak Hypothesis (LIH), Horizon of Reflection to Information Hypothesis (HRIH), and Market Emotional Index Hypothesis (MEIH) supported by empirical test in international markets. Some new concepts has been drawn and computed, such as Rush Efficiency (RE), Average Bias in Value (ABiV), and Market Emotional Index (MEI) in order to compare the efficiency of markets. The theoretical study started with three assumptions for Efficient Market Hypothesis and Fama's Classification, based on researching for Noise theory and Behavioral Finance, pointed out the limitation in EMH. Some new ideas have been addressed in this thesis, such as Leakage and Inleak Hypothesis (LIH), Horizon of Reflection to Information Hypothesis (HRIH), and Market Emotional Index Hypothesis (MEIH), as modification to EMH.As support for theoretical study, empirical tests mainly contained the test possibility of Contrarian Strategy and Momentum Strategy in earning abnormal return and predictability based on time series analysis to find out exist of the Leakage Effect in international markets. Some available results has been chosen for evidences for the Inleak Effect. Computing the Rush Efficiency (RE), Average Bias in Value (ABiV), and Market Emotional Index (MEI), market efficiency in reflection to information has been researched. Some findings, as part of results for researching in this period, are listed below: (1) EMH will continue to be main theory for modern finance, describing a perfect condition when market perform equilibrium like the dreamboat for economists; Whereas, Behavioral Finance considers illustrating situations against rational expectation in real markets and limitation in arbitrage, which should be a part of classical finance rather than fighter. (2) Markets in real world should be noise market but efficient markets with Leakage and Inleak Effect based on existence of noise traders and cost for collecting information. (3) Price would perform Value Reversal to individual information shock, with Horizon of Reflection to Information. On the other hand, price in market perform Bias in Value because of much shorter horizon of information appearance. (4) The market efficiency could be measure and compare by using Rush Efficiency (RE) and Average Bias in Value (ABiV), finding out how long the lag for reflecting to information and how much the bias in value is. Another use of them is comparing the efficiency in different markets. The Market Emotional Index could be employed for investigation how investor expects the future, which would be another dimension describing market efficiency. In chapter 1, concentration on literature review for market efficient theory. Introduction to the beginning of efficient market, three forms efficiency, its process of development and some anormalies in testing to Efficient Market Hypothesis.The chapter 2 is main part of this thesis, stating Leakage and Inleak Effect in real securities market, starting with analysis for the three assumptions of EMH and criticism from Noise Theory. This thesis drew out Horizon of Reflection to Information Hypothesis and brought forward two dimensions, Rush Efficiency and Average Bias in Value, to scale and compare market efficiency.In chapter 3, Contrarian Strategy and Momentum Strategy have been tested to provide evidence for Leakage Effect in th...