Dr. Ranawat & TV Raman Page 1 9/17/2012Page |1
TESTING SEMI STRONG FORM OF EFFICIENT
MARKET HYPOTHESIS OF SELECTED STOCKS OF BSE
Dr. Mahendra Ranawat
Principal, BNPG Girls College, MLS University, Udaipur, Rajasthan
T. V Raman
Research Scholar, Department of Economics, MLS University, Udaipur, Rajasthan
0120-4392335, tvraman@abs..edu, 98680 40240
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In the major stock market of the world , it is the forces of demand and supply that sets
prices. There are hundreds of analysts and thousands of traders, receiving new
information on a company through electronic and public media. The Efficient Market
Hypothesis (EMH)implies that a if a new information is revealed about a firm it will be
incorporated into the share price rapidly and rationally , with respect to the direction of
the share price movement and the size of the movement. Market efficiency is directly or
implicitly tested in the study, which is performed to identify stock price reaction to
certain events such as budget announcement ,policy announcement and diwali. It can be
studied under weak form, semi strong form and strong form of market hypothesis. This
paper is an attempt to study the semi strong form of hypothesis that the prices or
movements in share prices are affected by the past and publicly available information.
The present study examined the behavior of daily stock returns for 7 prominent
companies listed on Bombay Stock Exchange (SENSEX) from Jan 1st to Dec 31st,2010.
Three major events were taken into consideration to evaluate the effect of publicly
available information on stock prices. The study revealed that the market instantaneously
absorbs all the relevant information as it becomes publicly available which indicates that
the semi strong form are inefficient during the study period. The study depicted that
SENSEX is weak form during the selected period. Finally, it concluded that stock market
efficiency does not mean that investors have perfect powers of prediction: all it means is
that the current level is an unbiased estimate of its true economic value based on
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The share price movement is analyzed broadly with two approaches namely:
Fundamental analysis and technical analysis. Fundamental approach analyses the share
price based on economic, industry and company statistics. The Technical analyst mainly
studies the stock price movements of the stock prices. An “Efficient Market” is defined
as a market where there are large number of rational profit makers actively competing
with each trying to predict future market values of individual securities, and where
important current information is almost freely available to all the participants.
The efficient market hypothesis is concerned with the behavior of prices in asset markets.
It suggests that profiting from predicting price movements is very difficult and unlikely.
The main engine behind price changes is the arrival of new information. A market is said
to be efficient if prices adjust quickly and on average without bias, to new information.
As a result, the current prices of securities reflect all available information at any give
point in time. There are various forms of market efficiency.
Under weak form of efficiency, the current prices reflects the information contained in all
past prices, suggesting that charts and technical analysis that use past prices alone would
not be useful in finding undervalued stock. The weak form of the efficient markets
hypothesis asserts that the current price fully incorporates information contained in the
past history of prices only. That is, nobody can detect mispriced securities and “beat” the
market by analyzing past prices.
Semi Strong Form:
Under semi strong form of efficiency, public information includes not only past prices,
but also data reported in a companies financial statements, earnings and dividend
announcements, announced merger plans , the financial situation of companies
competitors, expectations regarding macroeconomic factors (such as inflation ,
Semi Strong form efficiency implies that share prices adjust to publicly available new
information very rapidly and in an unbiased fashion, such that no excess returns can be
earned by trading on that information and neither fundamental analysis nor technical
analysis techniques will be available to reliably produce excess returns.
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To test for semi strong form efficiency, the adjustment to previously unknown news must
be of a reasonable size and must be instantaneous. To test for this, consistent upward or
downward adjustments after the initial changes must be looked for. If there are any such
adjustments it would suggest that investors had interpreted the information in a unbiased
fashion and hence in an inefficient manner.
The assertion behind semi strong market efficiency is still that one should not be able to
profit using something that “everybody else knows” (the information is public).
Nevertheless, this assumption is far stronger than that of the weak form of efficiency.
Semi Strong efficiency of market requires the existence of market analysis who are not
only financial economists able to comprehend implications of vast financial information,
but also macro economists, experts adept at understanding processes in product and input
markets. In effect, the semi strong form of market hypothesis maintains that as soon as
information becomes publicly available, it is absorbed that and reflected in stock prices.
Furthermore, even while the correct adjustment is taking place, the analyst cannot obtain
consistent superior returns.
The strong form of market efficiency hypothesis states that the current price fully
incorporates all existing information, both public and private (sometimes called inside
information). The main difference between the semi strong and strong efficiency
hypothesis is that in latter case, nobody should be able to systematically generate profits
even if trading on information not publicly known at the time. The rationale for strong-
form market efficiency is that the market anticipates, in an unbiased manner, future
developments and therefore the stock price may have incorporated the information and
evaluated in a much more objective and informative way than the insiders.
OBJECTIVE OF THE STUDY:
To indicate whether prices of stocks consider past information and information
publicly available as required by the semi strong form of Market Efficiency
To identify the relationship between SENSEX and Different companies taken in
To study the variation caused in the return of the Index and the companies taken
in the sample
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The study was descriptive in nature. The population of the study was seven prominent
companies listed in Bombay Stock Exchange (SENSEX).Data was collected from the
secondary sources. Daily price data of the stock prices of SENSEX and seven companies
was collected from the website of BSE.
The sampling frame of the study was for the period from 1st January, 2010 to December
31st, 2010.To test the difference between Returns and announcement date T-Test was
applied, to identify the degree of relation and to establish relationship between stock
prices and publicly available information, Regression was applied, and to study the
difference in variation of means between the returns of SENSEX and seven companies,
ONE WAY ANOVA was applied.
Weak Form: Ho: The price movements in the share prices in the SENSEX are not
affected by past prices.
Semi Strong Form: H1: The security prices do not fully reflect all publicly available
FINDINGS OF THE STUDY:
Analysis of T Test:
The question of whether the excess returns around the announcement date are different
from zero is answered by estimating the T value for each event. T statistics is used to
compare the returns of the stocks 15 days before and 15 days after the event. In this study
I have taken 5 % level of significance.
T VALUE T CRITICAL VALUE
Y BUDGE DIWAL Y BUDGE DIWAL
DEV T I DEV T I
TCS 0.926 -0.291 0.123 2.060 2.069 2.064
TATA -0.199 -1.773 -0.362 2.056 2.052 2.052
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RCOM 0.983 -1.347 2.669 2.056 2.052 2.048
MARUTI -3.053 1.246 -0.282 2.048 2.080 2.052
INFOSYS 0.132 1.092 -1.952 2.056 2.060 2.052
ICICI BANK -0.321 1.204 0.564 2.069 2.064 2.064
HDFC BANK 0.311 0.482 -1.037 2.052 2.064 2.069
TCS 0.363 0.773 0.903
TATA POWER 0.843 0.088 0.720
RCOM 0.335 0.189 0.013
MARUTI 0.005 0.227 0.780
INFOSYS 0.896 0.285 0.061
ICICI BANK 0.751 0.240 0.578
HDFC BANK 0.758 0.634 0.311
In the table given above T value has been calculated and T critical value is the tabulated
value. If the computed T value is less than the tabulated T value we reject our null
hypothesis and accept alternate hypothesis i.e. there is significance difference between
the return of Sensex and each of the seven companies. Correspondingly we will also
check the P Value , in case if we are rejecting our null hypothesis , The computed P value
has to be larger than 0.05 % level of significance.
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Taking the first event into consideration i.e. the monetary development policy
announcement on July 26, 2010, all the companies value of T is less than the tabulated
value of T critical , except for Maruti which is out side the range of +/- 2.048 also the P
value is smaller than 0.05 , thus we find that there is no significant relationship between
the returns of Sensex and 6 companies other than Maruti with the announcement of
Monetary Development Policy. All the 6 six companies show T value less than the T
critical value and also show P value larger than 0.05 hence in all the cases except for
Maruti we are accepting our null hypothesis i.e. there is no significant relationship
between the returns around the announcement date, while there was a significant
relationship between the returns for Maruti’s stock around the announcement date.
Taking the second event into consideration i.e. Budget announcement on Feb 28, 2010, It
is observable from the given table that for all the 7 companies the computed T value is
less than the tabulated T critical value also the P value for all the companies is larger than
0.05, hence we can say that there is no significant relationship between the returns of
Sensex and seven companies around the announcement date. Hence we accept our null
hypothesis and reject our alternate hypothesis.
Taking the third event into consideration i.e. Diwali on Nov 5, 2010, it is observable from
the table above that for all the companies except Reliance Communication the calculated
T value is less than the Tabulated T critical value, also we can see that the the calculated
P value is larger than 0.05 for all except RCOM , hence we can say that there is no
significant relationship between the returns of Sensex and 6 companies other than
Reliance Communication around Diwali. The T value for RCom is larger than the
tabulated T critical value and also P value is smaller than 0.05, hence in case of RCom,
there is a significant relationship between the return of Sensex and RCom around Diwali.
Thus to conclude we can say that in all the sample events except for 2 our Null
hypothesis is accepted that the security prices of almost all the companies does not fully
reflect all the publicly available information.
Analysis of Regression:
Regression analysis is done to find out whether stock prices adjust with the publicly
available information or not. In this analysis, the dependant variable is seven different
prominent companies listed in SENSEX , which were taken into the sample and the
independent variables are the events where the days prior to events are valued as zero and
the days after the event are valued as one, the other independent variable is the return of
Y= alpha+ B1X+ B2D*
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Where, Y= Return of the company
B1= Beta for X
B2= Beta for D*
D*= Budgetary Impact/ Social impact (Diwali)
Statistical significance of regression is estimated by t statistic for each coefficient. In this
study 14 events wise equation of regression were formed:
Company Equation for Excess Return T
TCS RETURN 1.742+ 0.014 (SENSEX RETURN ) + 1.631 (BUDGET ) 1.259
TATA RETURN -9.057+0.098 (SENSEX RETURN) + 10.780( BUDGET) 3.329
RCOM RETURN -0.834 + 0.01 ( SENSEX RETURN ) + 1.090 (BUDGET) 2.823
MARUTI 3.232 +0.088 (SENSEX RETURN) -13.389 (BUDGET) 2.799
INFOSYS 13.473+ 0.074(SENSEX RETURN) -7.974( BUDGET) 2.172
ICICI RETURN 1.618 + 0.077(SENSEX RETURN) -2.420( BUDGET) 6.836
HDFC RETURN 8.409 + 0.088(SENSEX RETURN) -0.044( BUDGET) .330
SOCIAL EVENT: DIWALI
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The T value calculated after regression is to be compared with the critical value of +/_
1.96. We can see from the above table that the effect of Diwali on the stock prices taken
into observations were not significant except for TCS and TATA Power, while the impact
of Budget announcement in all the sample companies except TCS and HDFC Bank were
With this result it can be analyzed that most of the companies do not react much in their
stock returns with the happening of some prominent event, which proves the null
Company Equation for Excess Return T statistic
TCS RETURN 4.348 + .047(SENSEX RETURN) -0.128 (DIWALI) 3.729
TATA RETURN -3.438 +0.047(SENSEX RETURN) +1.954 (DIWALI) 3.955
RCOM RETURN -0.520 +0.023(SENSEX RETURN) -8.823 (DIWALI) 1.083
MARUTI -8.062 + 0.187 (SENSEX RETURN) -68.544(DIWALI) .933
INFOSYS -19.045 +0.449(SENSEX RETURN) -131.374(DIWALI) 1.049
ICICI RETURN 3.254 +0.188(SENSEX RETURN) -64.552(DIWALI) 1.131
HDFC RETURN -12.10 +0.352(SENSEX RETURN) -103.323(DIWALI) 1.083
hypothesis of the study that does not fully reflect all publicly available information. As
per semi strong form of market efficiency the publicly available information do affect the
stock returns but only in very shorter span the market absorbs all the available
information and does not allow the investor to earn abnormal returns. Only few insiders
can earn a profit on a short run price changes rather than the investors who adopt the
naïve buy and hold policy.
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Analyses of One Way ANOVA:
One Way ANOVA has been used in order to see as there is any significant relation
between the return of SENSEX and those of 7 companies in the sample . And also to
identify the difference in the mean values of both the dependant as well as independent
variable which have been impacted on account of a single factor, i.e. the occurrence of
event. Dependant variable is the return of different companies taken in the sample size
and the independent variable is return of SENSEX.
Company Name F Value F Critical P Value
TCS 5.05 4.07 0.03
TATA POWER 5.17 4.07 0.03
RELIANCE 5.64 4.07 0.02
MARUTI 5.24 4.07 0.03
INFOSYS 3.09 4.07 0.08
ICICI BANK 4.73 4.07 0.03
HDFC BANK 3.91 4.07 0.052
Here we compare the calculated F Value with F critical value , if F value is larger than
the F Critical value and the corresponding P Value is less than 0.05 which is the level of
significance, it means that there is significant relation between the means of two data.
Hence we can analyze that for all the companies taken in sample except for Infosys and
HDFC bank result shows that there is significant relation, implying that budget
announcement has not left much impact on the returns of these companies and it is
possible to predict the behavior of these stocks.
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Large investors have clout over the companies and can get the information they desire for
decision making, where as small investors do not have such a privilege and are often
deprived of important information. Large investors can also afford to have professional
analysis but small investors have to depend on the publicly available information.
Channeling small investors saving into corporate investment is vital for economic growth
of developing countries. And to create in small investors, it is important to provide
relevant, reliable and ready to use information. The investors should keep the following
points in mind before investing:
Read and properly understand the risk associated with investing in securities before
Assess the risk – return profile of the investment as well as the liquidity and safety
aspects before making your investment decision.
Invest, based on sound reasoning after taking into account all publicly available
information and on fundamental.
Try to understand the risk involved in the investment and take down the important points
associated with the risk before making any investment decision.
Don’t be misleading by the rumors circulating in the market, as these rumors could make
an impact over a good investment strategy.
Try not to be influenced into buying stocks of fundamentally unsound companies based
on sudden spurts in trading volumes or prices or non- authentic favorable looking
Don’t be mislead by so called ‘hot tips’, as this would not be a good strategy to rely on
someone else thinking for investing your money.
At the end of this research work, it would not be hard enough to understand that the
markets cannot be easily demarcated as highly efficient or low efficient. Any market
cannot be a perfect one around the globe. The markets can be highly efficient but only to
an extent. What we can say easily that the markets around the world have both the
features of an efficient market as well as an inefficient market. And the common
phenomenon which can be seen in terms of both the markets is that the investors and
traders with more knowledge about the market are able to surpass the investors or traders
who do not have either access or supply of the knowledge,
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Most classical investment theories have tends to stereotype the whole phenomenon of the
market working. There work are based on one assumption viz. investors always act in a
manner that maximizes their returns. But there has been incidence to prove them wrong I
their assumptions. There are volumes of research work that shows that the investors are
not so rational and logical at times. Psychological studies, for example, have repeatedly
demonstrated that the pain of losing money from investments is nearly three times greater
than the joy of earning money. There have been many research showing that even though
there are many stocks which promise a lot of returns for the investors yet they tend to be
risk averse and put money in a lower risk stock.
When taken into reference the semi strong hypothesis says that stock prices accurately
reflect all publicly available information regarding a company, or any news announced in
the market. All information regarding the firm’s balance sheet, earnings, dividends, etc.
have already been taken into account in the company’s current market price. New
information on companies , industry, economy, and so on arrive in a random fashion ,
therefore changes in the stock market prices also take on a random pattern. It then follows
that since the resulting changes in the price occur randomly, investors can not use the
information to earn above average returns. This means that when stocks are traded, prices
are accurate signals for capital locations and there is no one who can take the advantage
of that in order to enhance his/her returns and be able to capitalize the market.
The study reveals that Indian stock market (SENSEX) taken in the sample does not have
semi strong form of market efficiency and the effect of sample events was random as
different methods used in the research work shows different result on different events
occurred. Some of this methods & tools used shows that market is efficient while other
says that it is perfectly inefficient. So we can say that it is not possible to say that a Indian
stock market is strong efficient market or semi strong efficient market or weak form of
efficient market, the efficiency remains in the market for a short period of time as the
value of T and regression is close to critical value.
The result of this research work is only suggestive and no special generalization can be
drawn. Further the exclusive and extensive research can also be made for the general
events of the companies like dividend announcement, merger, bonus issue, stock split etc.
Another trait of the successful investor is the ability to stick with their investment choices
and let their profits run. On the other hand unsuccessful investors tend to follow fads and
sell out too soon. Finally, successful investors tend to invest in what they know industries
and companies with which they are already familiar.
Dr. Ranawat & TV Raman Page 13 9 / 1 7 / 2 0 1 2 P a g e | 13
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