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The study on efficient market was initiated since the introduction of the efficient market hypothesis (EMH) by Eugene Fama in 1970 (Lalitha et al 2009). As suggested by Hui (2010), EMH was generally believed as immediate market reaction on any news about the individual and the whole stock market. This reaction will cause the price of the share to response instantaneously with the arrival of the information. Yet, in order to achieve greater returns by holding randomly portfolio investment, the investors always apply technical analysis especially studying the market price to forecast future price. Other than that, the analysis on company profit and asset value will also useful to achieve the good return.
In addition, as opined by Kim and Shamsuddin (2008) most finance academicians still believe in efficient capital market which imply that stock price fully react on newly available an relevant information about the stock market. This will show that, the current stock price is the best source to determine future price given only past price and data on stock return which entail random walk. However, finance practitioners always on the opposite belief that the price does not follow random walk.
There are many studies done on EMH globally. This is particularly related to in determining the market efficiency of an emerging financial market. In this case, the results of the studies are mixed and conflicting each other (Islam et al, 2005). With regards to that, Asian market as one of the emerging market has attracted considerable attraction for research subject mainly on EMH. The reason for this is because the economy and the stock market of Asian countries are growing rapidly. This gradual growth arise as the result of financial liberalisation which influencing stock market activities. The consideration on reseracing EMH in this region also take place due to the Asian financial crisis that badly impacted the countries in the region (Kim and Shamsuddin, 2008)
Pertaining to this issue, this article will review the research done on EMH particularly to find the conclusion on efficiency of the Asian market as the effect of the financial and economic crisis that happened and severely impacted the counties economies. Finanlly, this article will conclude and suggesting on the outcome of the studies.
Efficient Market in Asian Countries.
EMH become the subject of research interest by looking at so many dimension of EMH itself. For example, the volatility of stock price towards efficient market, EMH is usually examined on the country basis by looking at whther the market is being efficient or not.
According to the study conducted by Stefan (2009), Efficient Market Hypothesis was the idea developed by Eugene Fama in the 1960s in his Ph.D dissertation. The basic idea of EMH states that stock price will be reflected instantaneously by all available information in the market. As suggested by Mishra, Das and Pradhan (2009), market efficiency is an expression use to describe the association of stock price and market information. More critically, it examines the stock price effect given the degree, the speed and the precision of all available information. Since there are many types of information that affect the share price, hence there are three forms of EMH. Namely, the weak form of EMH, semi strong form of EMH and strong form of EMH (Stefan, 2009).
Mishra et al (2009) further elaborated that weak form of EMH exists when the security prices react to all past information about the stock. In this form of efficiency, the investors will not earn excess profit if they just rely on past information in their trading strategy. Under semi-strong form efficiency, share prices reflect all available information that is publicly available to them. In addition, Stefan (2009) asserts that the publicly available information includes past prices and returns, companyâ€™s financial statements, accounting practices, earnings and dividend announcements, and competitorsâ€™ financial situation. In this situation, investors cannot earn above-average profit if they base their trading decision on this type of information (Mishra et al, 2009) the last form of efficient market is strong form. Under this type of efficiency, all information including public and private are reflected in the share price. Investors who trade based on this information cannot expect to outperform or gain super-normal profit.
The level of efficiency is determined by the ability of the market to integrate information into stock prices. However there is no strict quantitative method to measure the level of the efficiency. Instead, there is harmonious view that the efficiency is subdivided into three structures. They are classified as weak, semi-strong, and strong form efficiency (Chaves, 2008).
As suggested by Islam, the main challenges are divided them in five forms. First, the empirical test for EMH shows no evidence in support of EMH, second, the limitation of the statistical and mathematical models for EMH, third, the evidence of the excess volatility mean reversion predictability, fourth, the existence of bubbles, and lastly the existence of non-linear complex dynamics and disruption in the stock market.
Free market is market where there is no government intervention or little government interference on the market itself or to the individuals and organization in the economy. The proponents of free market give view that free market is more efficient than markets which are not free. However free market is different from efficient market. Market with government control can be no less efficient than the former in the sense that it can reduce the possibility of market failure. Satatman, 2010
Study on efficient market hypothesis has been the center of the research since 1970s. The researches examine the stock market efficiency in respect of the extent of the function and the measurement of the efficiency in the economy. In general, EMH is understood as conditions where price of securities react to new information arise in the market without delay( Hui, 2010)
According to Islam and Clark (2005) p. 2, â€œEMH has two dual aspects of the rational expectation hypothesis and the risk-neutral behaviour of investing agents. The tests of EMH relate to the issues of predictability, anomaly, seasonality, volatility and the existence of bubbles. Studies of all these issues enable an analyst to draw a conclusion about the efficiency of a financial market of a country.
There were many studies done on efficient market hypothesis in Asian Countries. There were done to examine the efficiency of the market based on one country per se or were done by using the sample of several countries in the research. Studies that was done on one country basis for example the study on EMH in Thailand that was done by Islam and Clark (2005), in India by Mishra et al (2009), Malaysia b y Tan et al (2010) and Cheong (2008), Sri Lanka by Abeyseker (2001).Moreover, in terms of the study that had used several countries in the sample for example studies that was done Kim and Shamsuddin (2008), Kim (2004), Lim, Brooks and Kim (2007), Ndu (2007) and Lim 2007.
According to Kim and Shamsudin (2008), the Asian market has been the considerable interest of research because this region has many dynamic economies that are growing and increasing stock market volume. In addition, these Asian countries consist of developed as well as emerging markets. In addition, this emerging markets also has been exposed to many financial liberalisation and its ongoing development in stock market becomes an interesting avenue to study. Furthermore, studies on East Asian markets still remain important because these countries have high economic growth. In addition, the stock markets are exhibiting high returns, high volatility in return and high illiquidity (Ndu, 2007)
According to Ito (2007), the 1997 Asian financial crisis started on July 2, 1997after the Thai baht was floated. It is believed that, there was less sense of urgency after the event. As a result, the Thai baht lost by 15% with immediate effect. The event then spread to other neighboring countries in six month time. On July 2, 1997, the Thai baht was floated. This was the beginning of a crisis that would spread to other neighboring countries in the following 6 months period. In most East Asian countries, the exchange rate had depreciated from July to September 1997, but the degrees of their depreciations were less than that of the baht. Due to that situation, the countries in the region were divided into four groups according to the degree of depreciation. The first group was Thailand because the Thai baht was the most currency depreciated at that time, the second group consist of Malaysia (Malaysian ringgit), Indonesia (Indonesian rupiah) and the Philipines (Philippine peso) the third group with slim depreciations included Singapore(Singaporean dollar), Taiwan ( New Taiwan dollar), and Korea (Korean won). The fourth group that maintained their dollar pegs was China (Chinese Yuan) and Hong Kong (Hong Kong dollar. Nevertheless, in December the same year, the Indonesian rupiah and the Korean had defeated Thai baht in terms of their cumulative depreciation from the end of June. Moreover the condition of Korean won was worse because the fall in the currency value was faster than Thai baht depreciation in July. Then, Indonesian rupiah led the fall of from December 1997 until January 2008. Many people believe that the spread of the decline was so rapid in the region. Overall, the financial crisis hit Indonesia the most because the Indonesian rupiah declined to one-sixth of its pre-crisis value in comparison with the US dollar. However, after the summer 1998 exchange rate in many of the countries had improved. Yet, many output activities and banking sector were still weak. The currency problems had caused the countries to experience negative growth rate in 1998. However, most of the countries showed significant improvement in 1990 and 2000. Although the crisis damaged the economic condition in the region severely, the improvement that started in 1999 had directed the countries to economic growth although it was lower than the period before the crisis.
Researches that were done for Asian Countries focused on many dimensions of EMH. The areas include study on weak form market efficiency for Malaysian sectoral stock market (Cheong et al, 2008), weak-form of the Efficient Markets Hypothesis in Sri Lanka Abeyseker (2001), comparison of market efficiency between the Chinese Market and the US market (Hui, 2010), tests for the martingale (or random walk) hypothesis in the stock prices (Kim, 2004), long memory properties in stock prices (Tan et al, 2010).
As opined by Kim and Shamsuddin (2008), testing for random walk theory has been the subject attention in finance literature because this test is the requirement for weak form EMH. Random walk theory suggested that stock price exhibit no serial dependencies or there no trend of share price. This implies that future price movements are determined entirely by unexpected information and therefore are random. Basically, this model has two testable impacts. First, the variance of return is linearly related with holding period and second, the share returns are unpredictable using the past price information. The first generation study on random walk theory exhibit different result with the second generation studies that use superior econometric methodology. In many cases the latter study shows that the result provided evidence that against the random walk theory. In addition, Tamara suggested that, the market can be concluded as random walk if the market responds to the new information very fast, impossible to use the share price is a reflection of all available information for market prediction and lastly market prediction cannot be done other than randomly.
Another important factor to study EMH in Asian Market is due to financial crisis that badly affected many Asian countries and thus the effect of market efficiency is worth considering. In relation to that, most of the studies also directly or indirectly examining the effect of two recent crisis that happened in Asia and globally to EMH in their researches. The two crises are financial crisis that was badly hit Asian market in 1997 and economic crisis that rooted in U.S. however most of these recent studies gauged the effect of the 1997 financial crisis since this crisis is more prominent in Asia.
In addition, EMH during the financial crisis is believed to associate with government interference. During a chaos situation in the crisis, the market is generally inefficient. Due to that, the authority needs to resolve the inefficiency problem to avoid inability of the stock market on fund distribution and economic growth. However, given the limited study on the factors that cause the market to be efficient or inefficient, this is the reason there is also less useful resources for the regulators to provide the policy on this matter (Lim et. al, 2008)
One study that examine the effect of financial crisis and economic crisis on EMH is study done by Lim, Brooks and Kim (2007) that studied on eight Asian market that include Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Taiwan as the study sample. Furthermore, the study that was done by Kim and Shamsuddin (2008) that has used the stock markets of nine Asian countries including Hong Kong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. A study that used many countries as the sample also was done by Ndu (2007) that consider stock market from ten countries involving China, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand. This study was done to examine the day of the week stock return pattern and determine the volatility of return in these ten countries.
Other than that, there are also many researches that were done to investigate the crisis impact on individual countries. One of the studies is a research done by Islam and Clark (2005) that study on EMH in Thailand pre and post financial crisis. Furthermore, in respect of 2008 global economic crisis, Mishra et al (2009) conducted a study in two main stock exchanges in India, Sensex and Nifty. Another interesting research that indirectly explore the consequences of financial crisis is study done by (Tan et al, 2010) that study EMH on the Malaysian stock market under both bullish and bearish periods covering from January 1985 December 2009. Cheong, Isa and Mohd Nor 2008 also studied on daily Malaysia Stock indices to examine the weak-form market efficiency for the years 1996 to 2006.
Another important point to note in EMH study is the test method that the author adopted in obtaining the result. Many of the studies in assessing the efficient market employed unit root test (Mishra et al 2009), (Tan et al, 2010) , (Cheong 2008), (Cheong et al, 2008), variance ratio test (Kim and Shamsuddin,2008) and rolling correlation test statistics Lim, Brooks and Kim (2007), autocorrelation test Islam and Clark (2005).
In examining the impact of financial crisis of EMH, the period covered is very important.
Many studies use the period of pre crisis, crisis and post crisis to see the whole overview of the efficient market in the economy Lim, Brooks and Kim (2007), (Kim and Shamsuddin, 2008), (Mishra et al 2009) (Tan et al, 2010), (Cheong, 2008), (Cheong et al, 2008). Some of the study only employed pre and post crisis period (Islam and Clark (2005), some consider only the crisis period and some only the post crisis period (Ndu, 2007).
The result of the studies on the financial crisis impact on EMH generally caused the market to be inefficient. In other words, the financial has impacted the efficiency of Asian market. However, on the country basis, the result is mixed. According to the study done by Lim, Brooks and Kim (2007), the financial crisis has badly affected the East Asian market as a whole. It is believed the poor market condition has caused the investor to overreact to local as well as international news. The result of the study showed that Hong Kong is the most efficient market for the fourteen years under period studied followed by Korea and Taiwan with Malaysia in the last ranking. However Hong Kong also was the hardest hit by the crisis followed by Philippines, Malaysia, Singapore, Thailand and Korea. However, most of the countries recovered in the post crisis period.
The result of the study also show that the level of market efficiency differ according to the level of the countries development. According to the study conducted by Kim and Shamsudin (2008) developed or advanced emerging markets that include Hong Kong, Japan, Korea, Singapore, Taiwan show weak-form efficiency, while the secondary emerging markets that include Indonesia, Malaysia, Philippine are found to be inefficient market before and after the crisis. Whereas, Thailand that was found to be inefficient before the crisis has become efficient after the crisis. The result before the crisis is in conformity with the study done (Islam and Clark (2005), but contradict for the result after the crisis.
The study that was done by Ndu (2007) that studies the day of the week stock return pattern using daily closing values market indices from January 1998 to October 31, 2003 focus on post crisis period. This study concluded that there is no day-of-the-week effect in Thailand and Malaysia. However, the result showed that, for other eight countries, China, India, Indonesia, Japan, Philippines, Singapore, South Korea, and Taiwan. In addition, this study also revealed that the East Asian Market seem to be less volatile in the daily return after the financial countries. Three countries with the highest volatility are South Korea (standard deviation of 1.2372), Malaysia (1.0848) and Taiwan (0.8971).
The study on efficient market that was done in India by (Mishra et al 2009) also showed that the market is inefficient during the period of study at the time of global financial crisis. An inefficient market creates the opportunity earning excess price by predicting the future price. Inefficient also could mean there is mean reversion the conditions that cause the stock price to return to its average price over time.
In the case of Malaysia, according to Cheong (2008), the 1997 financial crisis and currency control by the government has shown immediate effect of Malaysian stock market in general. All sector indices have shown significant structural changes after the two events. In addition, the result of the same study also shows that the processes of mean reverting exist in almost sector. The mean reverting process entail that, the share price tend to revisit the initial price trend which eventually will help future price prediction for the investors. In other words, this mean reverting process shows that most of the sectoral markets except Property market are in weak-form inefficient.
In addition, a research done by Lalitha et al revealed that after the financial crisis in 1997, Malaysian market was in the state of enhancing the market condition and positively affects the performance of the stock market. In this case, the researchers concluded that, the investors were very confident about winner shares and had the opposite view on loser shares. This condition brought about the deviation of the shares from their basic value. At the end of the day investors will take remedial action and cause the stock price to go back to its basic value when they realise their mistake.
In conclusion, according to Cheong (2008) the Asian financial crisis affects the Asian stock market immediately. In most of the study, the crisis impacted the market to be inefficient in most of the countries in the region (Lim et.al. 2008). The state of inefficiency is very high especially during the crisis itself from July 1997 until mid 1998. This is believe to be the due to volatility in the stock price and overreaction on the market price over the value of the information (Mishra et al, 2010)
Other than that, Islam et al (2005) argued that the inefficiency of Thai stock market is caused by the absence of necessary condition of an efficient market. The inefficiency is also due to financial and institutional weaknesses. The weaknesses direct to the assumption that policies and regulations in relation to liberalisation, deregulation and privatisation in the country have produced inconsistency and instability. In addition, the weak form inefficiency is also believed to due from poor development and the implication of policy choice.
This inefficiency is apparent to create arbitrage opportunities to the shareholders and abnormal profit which lead to market instability and finally cause the policy makers to interfere in the market affairs (Kan and Callaghan, 2007). As opined by Lim et al (2008), with regard to this matter, during the crisis, market efficiency can be enhanced by the action of the countryâ€™s authority to rebuild investor confidence and to pacify the market. However, the action must be appropriate and suitable for the country itself if not it could fail and worsen the economic condition.
In enhancing the efficiency of the market during the crisis time, in the study conducted, by Kawai (2005), the study revealed that after Asian financial crisis in 1997 -1998, the countries in the region have benefited from economic integration. This integration arises as the result of external liberalization, domestic structural reforms and market-driven integration with the global and regional economies. In addition, expansion of foreign trade and direct investment also cause this economic interdependence.
According to Misra et.al, inefficient market impacts the economy from two sides, negative and positive. In negative view, inefficient market could mean that the reversion of the mean price exist that will eventually will cause the expected return to fluctuate. Furthermore, in inefficient market, the stock price may not show the true value of the stock which affects the companies with low market value to easily raise the capital which has the opposite impact on the companies with high true value. Inefficient market also will show that there is too much volatility in the stock price in the short run due to overreaction on the market price over the value of the information. Lastly, inefficient market will also affect the economy because investment fund are not directed the most valuable venture. However, market inefficiency is not bad every time because it can enhance financial innovation process. In inefficient market, there is opportunity for excess profit that will encourage the invention of new financial product to take advantage of the environment.