Group 3: Putu Shandya Maharani (1506305117)

Putu Nadiani Putri Utama (1506305130)

Made Cahyani Prastuti (1506305144)

EFFICIENT MARKET
Efficient Market is define as one in which the prices of all securities quickly and fully reflect
all available information about these assets. We define the major concept involved with the
efficient markets as the efficient market hypothesis (EMH), which is simply the formal
statement of market efficiency concern with the extent to which security price quickly and
fully reflect available information. In 1970, Fama proposed dividing the hypothesis into three
categories:
1. Weak Form: One of the most traditional type of the information used in assessing
security values are market data, which refers to all past price information (volume
data also included).
2. Semi Strong Form: a more comprehensive level of market efficiency involves not
only know and publicly available market data, but also all publicly known and
available data, such as earnings, dividend etc.
3. Strong Form: the most stringent form of market efficiency, which assert the stock
prices fully reflect all information, public and non public.
As noted, weak form efficiency means that price data are incorporated into current
stock prices. Weak-form test involve the question all information contained in the sequence
of the past prices is fully reflected in the current prices. There are two primary ways to test
weak-form efficiency; statistically test and trading rules. Many test of semistrong efficiency
have been conducted. Event studies are used to make semistrong test. Abnormal return is
return on security beyond that expected on the basis of its risk and calculated for each
company for which a specific event is being examine.
= = ( )Where:
= the abnormal rate of return for security i during period t.
= the actual rate of return on security i during period t.
( ) = the expected rate of return for security i during period t, based on an index
model relationship.
Strong-form evidence takes the form of tests of the performance of groups presumed to have
private information and of the ability of professional managers to outperform the market.
Market anomalies are in contrast to what would be expected in total efficient market
several major anomalies are:
1. Unexpected Earnings (SUE): the market appears to adjust with a lag to the earnings
surprise be contained in quarterly earnings. SUE has been shown to be a discriminator
of subsequent short-term stock return
2. P/E Ratio: low-P/E stocks appear to outperform high-P/E stocks over annual periods
even after adjustment for risk and size.
3. The Size of Effect: evidence suggests that small firms have outperformed large firms,
on risk-adjusted basis, over period of many years.
4. The January Effect: much of the abnormal return for small firms occurs in the month
of January, possibly because tax-induced sales in December temporarily depress
price, which than recover in January.
5. Values Line Performance: appear to offer the average investor a chance to
outperform the averages from 1965 to 2002.
 OTHER ANOMALIES
Abnormal return is return on security beyond that expected on the basis of its risk. Others list
of anomalies have been reported and discussed, including in particular several calendar
anomalies ( time series ), Cross Sectional and Other.
1. Time Series
a. Day of the week
Research has shown that stocks tend to move more on Fridays than Mondays, and
that there is a bias toward positive market performance on Fridays.
b. The weekend effect
Refers to the tendency of stocks to exhibit relatively large returns on Fridays
compared to those on Mondays. This is a particularly puzzling anomaly because,
as Monday returns span three days, if anything, one would expect returns on a
Monday to be higher than returns for other days of the week due to the longer
period and the greater risk.
c. Turn-of-the-Month Effect
The turn-of-the-month effect refers to the tendency of stock prices to rise on the
last trading day of the month and the first three trading days of the next month.
d. Turn-of-the-Year Effect
The turn-of-the-year effect describes a pattern of increased trading volume and
higher stock prices in the last week of December and the first two weeks of
January.
e. The holiday effect refers to the tendency of the market to do well on any day
which precedes a holiday.
f. The momentum anomaly says that what was strongly going up in the past will
probably continue to go up in the near future
2. Cross Sectional
a. Low Book Value
Stocks with below-average price-to-book ratios tend to outperform the market.
Numerous test portfolios have shown that buying a collection of stocks with low
price/book ratios will deliver market-beating performance.
3. Other
a. Neglected Stock
A close cousin of the "small-firm anomaly," so-called neglected stocks are also
thought to outperform the broad market averages (stocks that are less liquid
(lower trading volume) and tend to have minimal analyst support. )
b. Reversals
Some evidence suggests that stocks at either end of the performance spectrum,
over periods of time (generally a year), do tend to reverse course in the following
period yesterday's top performers become tomorrow's underperformers, and vice
versa.
c. Earning Announcement
Sometimes stock prices go up until the earnings are announced, then decline on
the newsor they may decline before the announcement if expectations are not
positive. Expectations usually are based on analysts' reports, and their forecast of
future earnings. Many websites publish a consensus of earnings expectations.
d. The Dogs of the Dow
The idea behind this theory was basically that investors could beat the market by
selecting stocks in the Dow Jones Industrial Average that had certain value
attributes.