Share price movements and

Security market efficiency:

Table of Contents

Introduction .......................................................................................................
Efficient Market Hypothesis:............................................................................................
Stock Market Bubbles Undermine Confidence in the Efficient Market Hypothesis.........
Overview of the company................................................................................................
Shenergy Limited.............................................................................................
Sanghai Stock Exchange Composite Index.........................................................
Movements of the Share Price of Shenergy Ltd and of the Shanghai........................
Volatile Security Price Behaviour Mean................................................................
Implications for Investors and Companies.............................................................
References:...................................................................................................................

Page 2 of 19

Introduction
This paper will discuss the nature of security market efficiency and then an
application of understanding of stock market bubbles to a particular company. It will
also develop and demonstrate an understanding of the topic area of capital market
efficiency as well as apply theoretical understanding to the analysis of market
information in the context of a Shenergy Ltd. It will also interpret some information on
distance from the assumption that financial market performs well and price changes
constantly demonstrate real data. Furthermore, this paper will also illustrate what
episodes of volatile security price behaviour mean for the notion that security
markets work efficiently. On the other hand, the main reason of this paper is to
prepare a critical literature review of the competing views that stock market bubbles
undermine confidence in the Efficient Market Hypothesis. This will investigate the
movements of the share price of Shenergy Ltd and of the Shanghai Stock Exchange
Composite Index generally in the light of information available to investors.
Moreover, it will also define the actions and circumstances which may be related to
share price movements and what has influenced share prices on the SSE over this
time. This means, this will explain regarding the share price behaviour that have
been observed and confirms by any of the academic views encountered in the
literature review.

Efficient Market Hypothesis:

Lot of research has shown that efficient market hypothesis is the tool of measuring
the stock market efficiency. As proposed by (Fama, 1965) it is a theory which
determines the behaviour of stock market prices. It determines the change in the
share price as speedily as there are new financial facts or news released by the
company. To explain further about EMH Mishkin & Eakins (2006), put forward an
equation as,

Page 3 of 19

R (of) =R (*)
Where,
R (of) = Securities optimal forecast return
R (*) = Equilibrium return of a security
Here, equation above tells us that current prices in a monetary market will be set so
that the optimal foretell of a securitys return using all accessible information equals
the securities stability return. (Mishkin & Eakins, 2006, p.133).
Theoretically EMH is based in three types of theory which are Operational efficiency,
pricing efficiency and Allocation efficiency and have three forms which are Weak,
Semi-strong and Strong (Arnold, 2005). Factors which support the EMH are
investment analysis and mutual funds, stock price and public information, the
volatility of stock prices and the technical analysis (Mishkin & Eakins, 2006).
Whether the markets reflect historical, public and private or all the available
information that doesnt mean that the financial markets always work well. It depends
on various factors and depends on market to market basis. In most of the developed
markets there is behaviour of a random walk whereas in least developed markets it
does not always shows this character. In all type of market efficiencies, some shows
a mixed picture of generating abnormally high returns whereas some use some
strategy like trading strategy to get those high returns (Ma, 2004). In the same way
EMH suggests that negative news or information will also result in a fall in a share
price.

Stock Market Bubbles Undermine Confidence in the Efficient

Market Hypothesis
Stock market bubbles are the variations in the stock market in a specified time. As
we discussed earlier whenever there is new information released stock prices shows
an immediate response and according to Efficient Market hypothesis it is an
unbiased response. Therefore we can say that the bubbles in the stock market are
Page 4 of 19

the result of improvement in informational effectiveness system in the stock market

world. When the flow of the information keep coming, the changes in stock prices
happens more often which leads to the increase in market bubbles.
Here if we put the theory, based on studies done by several authors in empirical view
it does not support EMH fully. Different studies show that the prices always move
volatile, so past stock prices is not very useful in predicting the future stock prices.
According to Fortune (1999), these studies are not showing the proper evidence
because of two reasons. First, gross inefficiencies can co exist with the volatile
movement of the share prices and secondly by the 1980s a vast literature had been
developed which have discussed about the stock market anomalies. These
anomalies, defined as departures from efficient markets which allows the companies
to unexpectedly yield high returns and lead to rejection of the EMH.
The macro-economic point of view, the effect of the existence of bubbles is because
the stock of capital per capita of steady-state is such that the marginal productivity of
capital is equal to the growth rate of the population in the country. In other words, the
existence of bubbles causes individuals wish to build a smaller amount of capital
than they would, this will reduce the supply of capital, bringing the interest rate to the
level given by population growth. In this case, the position of steady- state is
dynamically efficient. Thus, the bubbles, if any, have a beneficial effect on the
economy, since they eliminate the inefficiencies dynamics to which it would be
subjected, otherwise. In the case of Shenergy Limited it is also identified that it
focuses on electricity consumption, which is not an issue to be examined only by its
investors. On the other hand, the company is spending on other as gas power,
hydropower, nuclear power and thermal power which also needs to be goal, in the
universe of companies, which, in many cases, have not paid attention to this and
continue to waste time and money on poor management of this resource. According
to Liu (2011), the governance structure of the board may affect the implications of the
role to make a critical decision making and monitoring and adapting to managing the
Page 5 of 19

purchasing portfolio, which will indirectly affect the profit management of the
company.
Lets take an example of NASDAQ index where the stock market declined by 50% in
one year period between 2008 and 2009. The question is what the key factor is for
this huge decline of the price. Some companies even forced into liquidation. Such
events definitely stretch the credibility of the EMH beyond the breaking point
(Malkiel, 2014). So many financial presses like Wall street Journal and business
week described it as failures of EMH and was a remarkable error. Some even said
that EMH played a major role for the crisis of 2008-2009 by making investors
deluded. (Shiller, 2003) has called it the most remarkable error in the history of
economic thought.
Financial markets are said to be efficient if prices provide the proper signals to the
allocation of ownership of the capital stock existing in the economy. It can be
distinguished between the financial markets efficiency levels: low efficiency and
strong (Shiller, 2003). If the share prices reveal all the information enclosed in the
historical sequence of prices they will be the low efficiency markets (Arnold, 2005). It
is therefore not possible to draw up an investment strategy providing preternatural
profits based on the evolution of prices. Also EMH depicts that in the semi strong
form, reflection of the information provided publicly is shown in the share prices and
thus favourable earnings announcements do not, on usual, results on stock prices to
ascend, because this information has already been reflected into the stock price
(Mishkin & Eakins, 2006).
In this context, any price change is purely random; in so that they follow a pattern in
the type time random walk. It can be said that financial markets are efficient in the
sense if current prices reflect not only all the information contained in the historical
prices, and all the information that is about domination in public and that is relevant
to determining the value of the shares of a company. Finally, financial markets are
said to be efficient in the strong sense the prices reflect all information not only
Page 6 of 19

publicly but also private and non public, even if this information is strictly the domain
private mind (Pike and Neale, 2006).
In the conventional view, it is assumed that agents form their Shenergy based on the
hypothesis of rational expectations, according to which subjective expectation of
agents coincides with the mathematical expectation obtained variable into account,
given the information available to agents in the period.
Liu (2011), think when the bubbles is seen, the period is all about optimism. People
are concerned about inequality, which is increasing. They are concerned with
information technology, which puts them in a period of uncertainty as to their
economic role in the long run, in a world that is increasingly automated. Not exactly a
classic bubble but the stock market tripled since 2009, this means something quite
dramatic which looks like a bubble. It is because of this that any increase in interest
rates would be positive, especially if they mention in the statement that there is
concern about speculative markets.
In the view of Evanoff, et al. (2012), an exacerbated speculative movement leads to
the formation of bubbles. However, since the speculation is an inherent feature of the
markets, not it should always be seen as irrational and that leads to forms formation
of bubbles. In the short term, the impact will be lower earnings and lower cash flow
due to a lower price of the commodity which has a portfolio of $ 288 billion. This
means that the actions have the potential to further falls in the company. It can be
said that Shenergy Ltd aims to create the Steering Committee Structuring Program,
Investment and Research in Natural Gas, Oil that will develop projects and actions,
set goals and indicators, and promote the integration and necessary transversal to
the development Structuring Program, Investment and Research in Natural Gas, Oil,
from proposals and guidelines presented by the Thematic Chamber of Naval
Industry, Natural Gas and Petroleum of Shanghai.

Page 7 of 19

Overview of the company

Shenergy Limited
Shenergy Group Company Limited is owned by the Shanghai government in China
and is known as state-owned enterprise. It is listed in Shanghai Stock Exchange and
also called as a parent organisation of Shenergy Company Limited. This organisation
is also engaged in the investments of oil, natural gas and electricity in Shanghai and
Eastern China regions. The company was reorganised in 1992 from the Shenneng
Electric Power Company. The main subsidiary of the company is Shenergy Company
Limited and is the first electricity energy company of China listed in Shanghai. This
company invest in several electric power generating and Thermal power plant
companies with the electric power company of Shanghai (Shenergy, 2015). The
company also includes environmental protection and energy saving. As mentioned in
(Shenergy, 2015), Shenergy Group as of now has nine investment organisations
including Shenergy Company Limited and Shanghai Gas (Group) Co., Ltd. with 15
shareholding organisations, accordingly and fundamentally shaping an improvement
example of the Synchronous expansion of Power and Gas and combination of
Industry and Finance. Before the end of 2014, the aggregate resources of the
Company have surpassed RMB 100 billion, the yearly income came to around RMB
30 billion and the Company has been recorded as a Top 500 Enterprises in China in
13 consecutive years (Shenergy, 2015).
Shenergy Group, the significant constructor of real vitality foundation in Shanghai
and the real supplier of force and gas items, has finished many key vitality ventures
with several power plants. Before the finish of 2014, Shenergy Group's era limit on a
valuable premise has added up to 7440 MW, which represented around 33% of the
aggregate era limit of Shanghai. In the interim, the Group has made the "5+1"
different gas source approaches, and established a proper gas modern chain which
supports generation, acquiring, pipeline conveyance and transportation, deals and
Page 8 of 19

gas supply. The volume of common gas supply in 2014 came to 7.16 billion cubic
meters, showing about 90% of the piece of the overall Shanghai industry. For
ensuring the protected vital delivery for Shanghai and rebuilding and upgrading the
vitality structure of the entire city, Shenergy Group has focused on the general
technique of "Advancement driven and Restructuring Development" as of late
(Shenergy, 2015). With steps being developed, the Group purposely advanced the
improvement of clean vitality and extension of vitality mechanical chain, occupied
with business territories, for example, wind power era, sun oriented force era, gas
power era, appropriated vitality supply, vitality sparing innovation for the force plant,
vitality exchange, new vitality funding speculation reserve, and so forth and made
positive commitment to Shanghai as far as low-carbon improvement, vitality
preservation and emanation lessening through positive actions, for instance,
denigration and desulfuration of force plants.
As per Shenergy Group's diagram, before the end of the period of"12th Five-Year
Plan", the era limit on a valuable premise will have hit 10,000 MW, the yearly
operation size of common gas will have stretched around 10 billion cubic meters,
and the securitisation proportion of the capital will come to 60%, making the
Company a vitality and money related mechanical speculation bunch with cutting
edge primary business and centre intensity (Shenergy, 2015)
Sanghai Stock Exchange Composite Index
SSe composite index is a whole market index which includes all listed stocks i.e. Ashare and B-shares at Sanghai Stock Exchange. SSE indices are used to all over
the world to evaluate the performance of the security markets in China. It consists of
75 indices together with 69 equity indices, 5 bond indices and 1 fund index. It was
reconstructed in 2002 which replaced the old SSE 30 with SSE 180. It reflects the
movement of the prices across a wide range of companies. SSE composite index is
a capitalized weighted index. (SSE, 2015). All A and B shares of SSE are daily

Page 9 of 19

tracked by this index and forecast the price performance. It was developed in
November 1990 with the base value of 100. (Bloomberg, 2015)

Movements of the Share Price of Shenergy Ltd and of the

Shanghai Stock Exchange Composite

Source:http://www.performance.morningstar.com/stock/performancereturn.action?
t=600642&region=chn&culture=en-US

At the end of 2008, were the first positive data for the world economy. The stock
prices of Shenergy Ltd entered into an uptrend, fetching levels from before the crisis,
with the maximum price reached in July 2009. Shanghai stock exchange composite
is already close to the maximum values achieved over the past three years. There
are several reasons for the causes of these extraordinary price shocks like
speculative trading and immature stock markets where shareholders are bit sensitive
towards the government frequent intervention in their administration process (Ma,
2004). If we see the trends in the latest period say past 5 year the company has
lagged behind due to several problems. A devaluation of over 50% was followed in
Page 10 of 19

its share price between the months of May and June 2010, but much of the loss has
been recovered at on several years later. The impact on the market value of the third
largest oil exploration company in the world was great. With a market value
estimated at 290 billion dollars, compared to almost 420 billion for other and 250
billion for Petro China, which ranks third, the Petrobras share price return to precrisis levels, the market value would rise to about 400 billion, virtually tied with the
industry leader. Shenergy Ltd exploits oil and natural gas and provides services in
the wells were among the most popular bets among investors earlier this year, taking
advantage of the rebirth of oil and gas production in China.
The shares of Shenergy Ltd linked to power followed the same path, reflecting
investors' fears that the global economy will be even weaker, stifling demand, and
lower oil prices reduce the incentive for energy companies to explore and maintain
properties expensive in the China, dropping the sales of energy service companies.

Source: http://www.bloomberg.com/quote/600642:CH

If we see the graph we can see that over the mid of 2015 in the matter of few weeks
in June and early July there was a sharp decrease of index from 5166 to 3700 which
wiped out $3tn worth of market value put the whole nation in a shock. There were
Page 11 of 19

other economic crisis because of the government involvement in past 25 years which
was not that hard to handle but this one was close to impossible to handle. To cope
with the situation they input the more state intervention and started cutting the
interest rates. Even some put the liability on states poor regulation and its role in
increasing the bubble as a reason for it to vigorously intervene to prop up prices
(Schell, 2015)
This was just the example over the short period of time but over the past 5 years
there were so many random behaviour of the share prices which is influenced by
several things as stated above. One investor lost most of his savings over the time
and complained over this happening as this was a stock devastation that thoroughly
smashed middle classed assets from a decade of motivation (Schell, 2015).
It is a warning of bubble that now Chinese stock markets are climbing higher and
higher despite the economy is cooling which is not a big concern. In fact, small
investors are buying and selling houses in most of the Chinese cities to get high
profit while also checking the increase and decrease of equity prices. They assume
that the so called bull market is backed by some unwritten government guarantee so
when something fell out the government would step in to pay attention of the things
and make it normal. Even the Chinese communist party started to inflate the bubblehelped the companies who have more debt to clean it up.
So, most influencing factors regarding the change in the share prices of SSE and
other stock markets is non other than the

government intervention , inherent

weakness in seemingly irrepressible market, free market economics, system with

little precedent and no operating manual, so called Chinese dream etc. (Schell,
2015).
.

Page 12 of 19

Source: http://markets.ft.com/research/Markets/Tearsheets/Summary?s=SHI:SHH

Volatile Security Price Behaviour Mean

If we see the history there are some examples where EMH cannot explain the
security price behaviour. Mostly it is linked with the boom and bust cycles of a
financial crisis. In case of shenergy Ltd. the results allowed the suggestion that the
relation discussed hasnt been stable during the long analysed term period, while the
most significant influence of the balance of the petroleum account on the Shenergy
Ltd commercial balance has been verified after 2010 in the aftermath of the
international economic crisis, and has been intensified in the recent years. After this
period, the volatile behaviour of petroleum account, embodied in the worsening of its

Page 13 of 19

deficit, in a way, has been absorbed by the country's commercial balance,

transferring in a way.
In accordance (Info, n.d.), with regard to external issues, the volatile behaviour
stands out of oil price in the last fifteen years, in a motion similar to that observed in
the commodity trade balance in China.

Source: http://www.infomine.com/investment/metal-prices/crude-oil/5-year/
The significant growth between 2010 and end of 2011, when the barrel of the value
went from $ 72 to $126, coincided with the expansion of Chinese trade deficits,
evidence that is borne out by the increasing displacement of imports, a trend that
was interrupted in 2008, when the barrel came to retreat 60% due to the international
financial crisis and consequently the reduction of global economic activity. It is also
examined that if the price of crude oil dropped below certain level, per barrel,
Shenergy Ltd may choose to reduce their investments, which may slow the growth of
production. The good news is that the market has specifically dedicated to the type
of professional management and analysis. So, is a business manager's account to

Page 14 of 19

make the choice that service provider based on market experience, reputation and
results achieved? After all, energy management and oil and gas field project is
already part of the reality of big business.
According to Wehrle (2008), the Shenergy Company, gas power, thermal power,
nuclear power and hydro power services are the most sensitive to the rise or fall in
oil prices. Presently, it can be said that the Shenergy company stock prices are
under greater pressure.
As discussed by Malkiel (2003) EMH is linked with random walk behaviour, random
departures, and are unpredictable and also future prices reflect future news and
independent of todays information where share price movements of SSE and
Shenergy also follows similar pattern to what several authors have outlined.
Implications for Investors and Companies
If we try to apply these academic theories in the real world which is changing
everyday and growing faster and faster there are several factors that will affect in the
decision making process of any investor or companies. Factors include
advancements in technology and social media, structural, societal and psychological
factors etc. The fact is that most companies still do not have specialised staff on the
subject, and often maintain a professional department to deal directly with that item
which is not feasible for business. There are implications for the investors of
Shenergy Ltd as well as for companies. The investors organise a state core to
generate and update the knowledge of the subject and follow up the implementation
of the objectives and actions proposed by the company established by
announcement whereas the companies need to improve the infrastructure of
passenger and cargo transport, energy supply and sanitation, to meet future and
economic demands arising from the exploration and production of oil and natural
gas. It is also identified that investors stimulate energy development in China, with
greater use of natural gas in the economy. They also need to expand the training and

Page 15 of 19

preparation of the state workforce at all levels particularly that set out on the coast, to
meet the demands of the sector. Moreover, there should be encouragement of
installation of complementary companies to supply chains and business service, by
guidance to investors, identification of areas with technical, economic and
environmental viability and support in integration with power grids, natural gas,
sanitation, and in various power fields.
It is examined that companies need to create the supporting sustainable
development plan that are involved directly or indirectly within the oil area, devoting
attention to employability actions, training and hand qualification of work,
entrepreneurship, support to investors business opportunities and use and
occupation. It allowed that Shenergy Ltd insisted on delivering the remaining
reserves (not yet committed) to investors and construction and petroleum and gas
project companies representing foreign interests, with even lower earnings for the
country. It should be noted that companies need to attract new business and
investors in oil and natural gas in the areas of shipbuilding and assembly, supply
chain of goods and service providers, promoting the generation of jobs and income
in the state. It is also examined by the companies that the main challenges of China
energy companies, investors say, is the domestic oil, relatively expensive to produce
at a time when world production remains high. The business models of these
companies are extremely profitable at current oil prices or even at lower levels.
Therefore, it is essential that the entrepreneur knows what the company is doing in
maintain the energy consumption and hiring, that makes clear the errors identified
and opportunities for improvement to then seek to understand what are the viable
changes that can be put in place. Another key factor, and also a difficult for many
companies is the contracting of electricity to meet its forecast of consumption. In
other words, the detailed analysis of the energy and the systematic monitoring of
electricity futures prices are fundamental for the best opportunities to be exploited at
the right time and costs are reduced. The investors can also create a support plan for
Page 16 of 19

sustainable development of the municipalities that make up the regions and that are
involved, directly or indirectly, with projects in the areas of natural gas and oil and
shipping industry, devoting attention to the employability actions, training and labour
skills, entrepreneurship, support to investors, business opportunities and use and
occupation.

Page 17 of 19

References:
Arnold, G. (2005) Corporate Financial Management. 3 ed. Harlow: Prentice
Hall.
Bloomberg (2015) Bloomberg. [Online]
Available at: http://www.bloomberg.com/quote/SHCOMP:IND
[Accessed 10 11 2015].
Evanoff, D. D., Malliaris, A. G. & Kaufman, G. G. (2012) Asset price
bubbles: What are the causes, consequences, and. [Online]
Available at: http://www.researchgate.net/file.PostFileLoader.html?
id=5551c9fb6307d9989c8b45e2&assetKey=AS
%3A273775101186048%401442284478278
[Accessed 17 11 2015].
Fama, E. F. (1965) The Behaviour of Stock Market prices. Journal of
Business, Volume 38, pp. 34-105.
Fortune, P. (1999) Stock Market Efficiency: An Autopsy?. New England
Economic Review, pp. 18-40.
Info, (n.d.) Commodity markets: a lot of. Info, pp. 37-55.
Liu, S. (2011) Board Governance and Earnings Management. Master
Thesis for the Master of Philosophy in Environmental.
Malkiel, B. G. (2003) The Efficient Market Hypothesis and Its Critics.
Journal of Economic Perspectives, 17(1), pp. 59-82.
Malkiel, B. G. (2014) What Does The Efficient Market Hypothesis Have To
Say About Asset Bubbles?. [Online]
Available at: http://www.forbes.com/sites/quora/2014/06/13/what-doesthe-efficient-market-hypothesis-have-to-say-about-asset-bubbles/
[Accessed 17 11 2015].
Ma, S. (2004) The Efficiency of China's Stock Market. Aldershot: Ashgate
Publishing Limited.
Mishkin, F. S. & Eakins, S. G. (2006) Financial Markets & Institutions. 5 ed.
London: Addition Wesley Educational Publchers.
Mokhatab, S. &. P. W. A. (2012) Handbook of natural gas transmission and
processing. s.l.:Gulf Professional Paublishing.
Page 18 of 19

Pike, R. and Neale, B. (2006) Corporate Finance and investment. Decisions

and Strategies. 5th Ed. Harlow:Financial times Prentice Hall.
Schell, O. (2015) Why china's stock market bubble was always bound to
burst. [Online]
Available at: http://www.theguardian.com/world/2015/jul/16/why-chinasstock-market-bubble-was-always-bound-burst
[Accessed 13 11 2015].
Shenergy (2015) http://www.shenergy.com.cn. [Online]
Available at: http://www.shenergy.com.cn/en/about/company-profile.aspx
[Accessed 10 11 2015].
Shiller, R. J. (2003) From Efficient Markets Theory to Behavioral Finance.
The Journal of Economic Perspectives, 17(1), pp. 83-104.
SSE (2015) www.sse.com. [Online]
Available at: http://english.sse.com.cn/information/indices/introduction/
[Accessed 10 11 2015].
Wehrle, C. (2008) Shanghais Power and Gas Situation.

Page 19 of 19