Event study for efficient market hypothesis ex dividend data Dissertation

Event study for efficient market hypothesis ex dividend data - Dissertation Example The intention of this study are efficient market hypothesis. The theory ‘efficient market’ was formulated by Eugene Fama in 1970. He described an efficient market as a market where at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. The efficient market prices represent the intrinsic value of the securities. Researchers have developed this hypothesis to be known as the Efficient Market Hypothesis (EMH) which states that the market prices reflect all information known to the public. Market react to any new information available in the market immediately as reflected in stock prices rather than gradually adjust it. This theory is an important concept in the area of understanding equity markets and cost of equity capital. Another important concept in the area of equity markets is that of random wa lk hypothesis. According to this hypothesis, the anticipated price of an asset fluctuates randomly around its expected value. Both the efficient market and random walk hypothesis, it is a futile exercise to try and find overpriced and under-priced assets. This is because, in an efficient market, the assets in the stock market are already reflecting all the available information. There are no future predictions that can be made about how a market will behave. The price of any assets is already a reflection of the best estimates for the expected risk and return of the assets. The suggestion that all the information known about past, present and future events is reflected in the current market prices means that the financial analysts are snake oil salesmen. This is why the EMH is such a controversial hypothesis. However, in an inefficient market, investors can identify miss-priced assets. Identifying the same can enable an investor to achieve gains (Rutterford, 1993). Because of these reasons, these hypotheses provide a solid theoretical and predictive model about the operations of the financial markets and influence more people to invest in stock market (Will, 2006). Types of Market Efficiency There are three primary categorization of EMH given by Fama (1970) according to the type of information reflected in the stock price – 1. Weak-form efficiency - Share prices reflect all past information and thus, rules out the possibility of predicting future stock prices on the basis of past