Ebook Market informational efficiency and investors’ rationality: some evidences on Romanian capital market
According to Fama [1970] even if financial markets are not able to fulfil all the sufficient conditions which are implied by the informational efficiency hypothesis, still it is possible to state its efficiency due to fair game model. The three forms of informational efficiency defined by Fama (weak, semi-strong and strong) could be considered as different levels of investors’ ability to correctly valuate shares. In consistence with Fama theory [1976], in an efficient market the true expected return on any security is equal with its equilibrium expected value. At this time, Fama’s theory on informational efficiency represents, at least for emergent capital markets, a “corner-stone” for any discussion about shares pricing. Informational efficiency hypothesis does not recommend a model for stocks’ price evaluation, but reveals investors’ ability to evaluate stocks in a proper manner. Fama [1970] presented various empirical tests, which had been previously performed in order to analyze the possibility of obtaining abnormal returns due to historical information about stocks, or due to publicly available or private information affecting them (serial correlation, distributional evidence, events studies). Several years after, Fama [1991] reviewed his 1970 work and classified empirical tests of market efficiency in the following categories: (i) tests for return predictability; (ii) event studies; (iii) tests for private information, which follow the three forms of informational efficiency. Megginson [1997] completed Fama’s classification with tests for rational fundamental valuation.
Most of the studies in Finance referring market informational efficiency hypothesis, express that it could be empirically tested by using some econometric methods based on random walk movements of returns. The significance of such tests is that investors could not forecast future returns of assets, if they follow a random walk. If the future price is not predictable, these tests confirm that each condition implied that no one could obtain abnormal returns is fulfilled. Practically, this statement represents the main stream in Finance literature (Megginson, 1997).
The econometric tests used in order to investigate efficient market hypothesis (EMH) reject the fact that returns are predictable. If it is a possibility to forecast assets’ returns, there are investors which could use this capacity in order to obtain systematic returns, and, obviously, there are investors which could obtain systematic losses. The main tests used to confirm EMH are : (i) tests of the serial correlation (see Kendall [1953], Alexander [1961], etc.); (ii) simple trading rules tests (see Alexander [1961], Fama and Blume [1966], etc.); (iii) overreaction tests (see, for example, Jegadeesh [1990], Jegadeesh and Titman [1993]); (iv) tests of long-horizon return predictability (see DeBondt and Thaler [1985], Poterba and Summers [1988], Fama and French [1988]). Other studies concerned to price adjustments after events (see the effect of the first announcement of dividends - Pettit [1972], Asquith and Mullins [1983], Michaely, Thaler and Womack [1995], etc.; the impact of a decrease/increase of dividends payments - Pettit [1972], Aharony and Swary [1980], Kalay and Loewenstein [1986], etc.). Finally, other tests try to confirm if some agents could obtain abnormal earnings (see tests of the capacity of the mutual funds managers to obtain an excess return - Sharpe [1966], Jensen [1968], Bjerring, Lakonishok and Vermaelen [1983], Ippolito [1989], Grinblatt and Titman [1989], Hartzmark [1991], Elton, Gruber, Das and Hlavka [1993] or tests of the profitability of insider trading – see Jaffe [1974] and Seyhun [1984]).
Based on the methods mentioned above, there were elaborated many studies regarding informational efficiency of emerging capital markets. On one hand these studied confirmed EMH its weak form (Branes [1986] – Kuala Lumpur Stock Exchange; Chan, Guo and Pan [1992] – major Asian financial markets; Cheung, Wong and Ho [1993] – Korea and Taiwan financial markets), and, on the other hand they rejected this hypothesis (Claessens, Dasgupta and Glen [1995] – 19 emerging markets). As well, capital markets of Central and East-European Ex-Comunist countries represent significant evidence for studies referring EMH (Nivet [1997] – Polish capital market, Chun [2000] – Hungarian capital market, Gilmore and McManus [2003] – Czech Republic, Poland and Hungary).
However, the absence of abnormal returns is not a sufficient condition to state the capital market is informational efficient. Fama [1970] states a market is informational efficient, if prices always fully reflect all available information. Stocks’ price could follow a random walk but this random walk could be completely independent of available information. For instance, stocks’ price could include diverse information, but incorrectly,and as a consequence, market will over or under-react to such information.
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