This report is going to discuss Efficient Market Hypothesis. This report is going to examine the weak form efficient market hypothesis on the FTSE 100 stock exchange market.
Data values from 01 January 2015-18 for Barclays from the FTSE 100 were obtained and analyzed rigorously. Using these resu...
This report is going to discuss Efficient Market Hypothesis. This report is going to examine
the weak form efficient market hypothesis on the FTSE 100 stock exchange market.
Data values from 01 January 2015-18 for Barclays from the FTSE 100 were obtained and
analyzed rigorously. Using these results, a number of statistical tests were carried out to see if
the FTSE 100 has weak form efficient market hypothesis present. To determine the validity
of the weak form efficiency in the FTSE100, many statistical tests were carried out, this
included structural break test, Jensen test, unit root test and a co-integration test.
Efficient Market Hypothesis
Efficient Market Hypothesis also known as EMH is an investment theory that is based on the
assumption that “security prices at any time fully reflect all available information.” (Fama,
1970). Following this assumption, this would mean that no investor would have more edge
over one another no matter how much analysis of the market has been carried out. There are
three forms of Efficient Market Hypothesis, these are Weak Form, Semi-strong Form and
Strong Form.
Weak Form
Weak form efficiency is one of the three different degrees of efficient market hypothesis. It is
a theory in financial economics that states that past price movements, volume and earnings
data do not affect a stock’s price and cannot be used to predict its future direction. It renders
the technical analysis of past data and market information irrelevant in the determination of
new prices. Additionally, in a market where weak form efficiency exists, the theory states
that no one can yield abnormal returns on a consistent basis.
Using Barclays, we obtained beta values. Historic Beta values show the volatility of an
individual stock in comparison to the unsystematic risk of the rest of the market. The beta
value obtained from the results was -0.121, this shows that the return on the share will be less
than 1 if the market return moves by 1 unit. This would mean that Barclays would have
“Defensive shares.”
In a time-series regression, structural break tests help’s with analysing the data, the structural
break test shows if there is a significant change in the data and were this change is within the
data. Our results show that the Fcalc (1295.235569) is greater than the Ftab (3.00), this meant
that the H0 was not accepted. This meant that shocks and events had an effect on the stability
of parameters. An event that could have caused this shock could’ve have been Brexit. “The
FTSE100 index has lost its value by nearly -9.77% year-to-date and the Sterling-Dollar down
by 5.71%”. (Aslam, 2018). Further testing was carried out to determine the Jensen alpha, the
Jensen alpha allows you to determine the abnormal return of a security over the theoretical
expected return. Jensen alpha is calculated assuming the CAPM is correct. The calculated
alpha was 70.739, as the value is positive this would mean that the portfolio would be earning
excess returns.
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