The aim of the assessment is to: Help you develop an understanding and a critical appreciation of capital markets theory and its impact on corporation, investors and all other stakeholders
The report will help you understand why market efficiency is important in order to provide market confidence.
Make reference to Market efficiency and the Efficient Markets Hypothesis reading chapter CH 2 p38-54 and many more sources .
Describe and explain the corporate finance environment encompassing: the financial markets (market efficiency)
Assignment Title: Market Efficiency CW2
Description of the assignment: You are required to write a report critically exploring the efficient market hypothesis.
The efficient market hypothesis is concerned with establishing the prices of capital market securities and states that the prices of securities fully and fairly reflect all relevant available information
(Fama 1970).
It has been widely argued that efficiency in the capital markets is important as it performs a significant role in providing confidence to investors that they are getting access to complete and accurate information and market prices displayed are true and fair (Malkiel (2003), Timmermann & Granger (2004), Watson & Head (2016).
You are required to write a report critically exploring the efficient market hypothesis. Your report should consider the different forms of market efficiency and use empirical evidence to provide a critique of the hypothesis.
Using 4 news briefings on any 2 listed companies of your choice (2 each), illustrate the efficiency or lack of efficiency in the capital markets. Using one of the companies you have identified above, prepare and present chart(s) of the total shareholder return (TSR) from the share price movement over the past five years. Calculate the average and standard deviation of monthly total shareholder return (TSR) over the five years. Stock market shareholder return graphs should be produced for comparison. Credit is given for correctly incorporating dividend payments into your company’s shareholder returns calculations. In the appendices include the actual tabulated data, correctly sourced and referenced and show your workings. Provide a brief commentary comparing the market returns to your chosen firm.
Report Guidance.
Your word-processed report should be no longer than 1,500 words (excluding references, appendices and tables) (+/-) 10 %.
All information must be appropriately sourced and referenced using the Harvard referencing system, both in‐text and in the references list. Inappropriate sources of information, such as Wikipedia, tutor2you, Investopedia, descriptive websites etc., will result in a loss of marks.
Recommended reading.
Malkiel, B,G.(2003). The Efficient Market Hypothesis and Its Critics .The Journal of Economic Perspectives, 03/2003, Volume 17, Issue 1.
Fama,E (1998) Market efficiency, long-term returns, and behavioural finance. Journal of Financial Economics 49 (1998) 283–306
Timmermann, A & Granger, C.(2004). Efficient market hypothesis and forecasting W.J International Journal of Forecasting, 2004, Volume 20, Issue 1.
Kauffman, Robert J; Spaulding, Trent J; Wood, Charles A.(2009) .Are online auction markets efficient? An empirical study of market liquidity and abnormal returns. Decision Support Systems, 2009, Volume 48, Issue 1.
Spyridon ,R (2016).Abnormal stock returns in Greece during the Cypriot banking crisis Journal of Money Laundering Control, 05/2016, Volume 19, Issue 2.
Frisch,T , Kolaric,S & Schiereck,D.(2014). Returns On Large Stock Price Declines And Increases In The South African Stock Market: A Note On Market.International Business & Economics Research Journal, 04/2014, Volume 13, Issue 3.
Watson,D & Head,A. (2016).Corporate Finance: Principles and Practice 7th Edition .Prentice Hall.
Introduction – 10 marks
- Clearly outline the objectives of the report & provide a brief introduction on the significance of market efficiency.
- Include theorists.
Efficient Market Hypothesis explored – 20 marks
- Efficient Market Hypothesis definition, (explained and explored in financial markets)
- Use theorists.
- Explore the different forms of market efficiency (weak, semi strong and strong form) (use some of the required reading to provide a critic of the theory.
Testing efficient market efficiency (EMH) – 30 marks
- You are required to select two companies and use 2 news /events on each of these companies to test market efficiency.
- Selection of 2 companies for examining evidence for and Against the EMH. Reasons should be provided for selection of the company and events and how these help to demonstrate efficiency or lack of market efficiency (semi strong market).You select a news(event) and see what the market/share price was before and after the event. Observe to see if the movement indicates that the market reacted timely and accurately to the news (no under or over reaction).You can also use theory /( academic references including required reading) to explain how shares should react in a semi strong market.(then explain if the market was efficient or inefficient using that news/event.
- List each theorist 4 minimum and explain and how the theory is linked to the business. Using the recommended and new theorists. Also include the charts and data e.g. Timmermans theory supports forecasting so give graph and explain.
- Use figures from yahoo finance – e.g. search (Aston martin historical yahoo finance) on google – click on first link, then click on historical data, change time period to 5 years, then change the frequency to monthly, click on apply, then download the data. Then put the data in a chart.
Company shareholder returns – 20 marks
- Using one of the companies above prepare 60 months returns (must be monthly). Draw a cumulative chart/graph and Briefly comment on the returns over the years possible in comparison to overall FTSE market returns over the same period.(use company beta to allow you to compare company returns with market returns)
- Selection of one of listed firms above. Correct data sourced, referenced in the report and presented. The Chart should be correctly presented with clear titling and labelling .Correct calculations of monthly returns in the appendix
- In appendix provide a table (calculation of monthly returns, averages and standard deviations)
