Title: Capital Markets Efficiency: Evidence from the Emerging Capital Market with Particular Reference to Dhaka Stock Exchange
Abstract: Though there is no universally accepted concept of the Efficient Market Hypothesis (EMH), it suggests that all publicly available information will be reflected so quickly and rapidly in the prices of the securities that no investor will be benefited through earning abnormal profits. The present study analyzes three forms of efficient market hypothesis - weak-form EMH, indicating that current prices fully reflect historical data; semistrong-form EMH, suggesting that prices of the securities reflect all publicly available information and the strong-form EMH, indicating that prices of the securities are reflected by all private and publicly available information. The principal object of the present study is to test the weak-form efficiency of Dhaka Stock Exchange (DSE), an emerging capital market in Bangladesh. The study finds that under weak-form of efficiency, stock prices of the listed companies of DSE change independently over time and that no investor will be able to earn abnormal profits. Fundamental analysis of the study deals with the financial analysis and determinants of valuation of the stock prices. On the other hand, the technical analysis emphasizes on the past price and volume data, as well as associated market trends to predict future prices of the stocks. I. PRELUDE The motivation of all the participants in the securities markets is presumed to be the same-to earn a return at least commensurate with the level of the risk assumed. It can be postulated that major capital markets seem to be relatively efficient most of the time; in most cases they have returns appropriate for the risk-borne. Efficient markets are those in which the expected return from investing is commensurate with the risk assumed. Stock prices arc determined on the basis of the expected cash flows to be received from a stock and the risk involved. Investors in securities use all the information in determining the stock prices. Therefore, information is the key to the determination of the stock prices and the key issue of the efficient capital markets (Keane, 1986). An efficient market is one, where the stock prices quickly and fully reflect all available information about the assets. This concept postulates that investors will assimilate all relevant information in determining stock prices. In an efficient market, securities are priced in an unbiased manner at any given time where the supply is equated to the demand. Such a price represents a consensus of members trading in the market about the price of the security, based on all publicly available information. These information includes past information, e.g., last year's or last quarter's earning, current information as well as events that have been announced, e.g., stock splits, announcements of dividend, bonus shares and the like. When a new price is being available, it should be interpreted and analyzed by the market. If any more information is not available, no change in the equilibrium price should take place. But now-a-days, it is a sine qua non to examine recent evidence on how security prices adjust to new information. In this connection, security prices accurately reflect all available information. A securities market may be defined as an efficient market if, (i) the prices of the securities traded in the market act as though they fully reflect all available information, and (ii) these prices react, instantaneously in an unbiased fashion to new information. In order to have market efficiency, there must be competent and well-informed analysts who continually evaluate the available information, regarding any particular security. Lorie and Hamilton (1973) argue that it may be the competitive effect of all investors, desiring profit from processing information that causes markets to be efficient. Market price of the securities will promptly and fully reflect what is knowable about companies whose shares are traded. The investors seeking superior returns make conscientious and competent efforts to learn about the companies whose securities are traded, and analyze relevant information promptly and perceptively. …
Publication Year: 2005
Publication Date: 2005-07-01
Language: en
Type: article
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Cited By Count: 20
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