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Efficiency and Indian Stock
Markets
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Volatility in Stock Markets
Volatility is the functionof uncertainty
Reasons Macro Economy
Index Trading
High Frequency Trading
Types
Inter-day volatility
Intra-day volatility
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Market Efficiency
Classification:
Operational Efficiency
Allocation Efficiency
Informational Efficiency
An efficient market reacts quickly and relativelyaccurately to new public information, and results inprices that are correct, on average.
The Efficient Market Hypothesis is: The theory that markets are efficient and therefore, in
its strictest sense, implies that prices accurately reflectall available information at any given time.
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Empirical Evidence on
Semi-strong Efficiency
Event studies examine stock returns to determine the impact of a particularevent on stock prices, in particular, what happens to the stock price, before,during and following the event.
Events include: Company-specific announcements such as stock splits, takeover announcements,
dividend changes, accounting changes.
Economy-wide changes such as unexpected interest rate changes
Most event studies have shown that stock prices change beforetheannouncement
These results demonstrate that an investor cannot move quicklyenough at the time an event occurs (announcement is made) toprofit from the change, so this speaks to market efficiency in thesemi-strong form,
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Empirical Evidence on Semi-strong EfficiencyEfficient (A) and Inefficient Markets (B) and (C)
Announcement Date
$23
$20
t
Stock Price
Time
A
B
C
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Empirical Evidence on Semi-strong
EMHTypical Event Study Result for Good News Event
Announcement Date
$23
$20
t
Stock Price
Time
A
B
C
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What happened?
The Nifty suddenly dropped by over 900 pointsto a session low of 4,888.20, a drop of 15.5 percent below Thursday's closing level in early trade
of Friday. Such a sharp drop activated the lower circuit
breaker which halted the trade for about 15minutes on the NSE.
Trade on the BSE was normal though the Sensexwas also affected by the sharp fall in Nifty pricesinitially.
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Why did the markets fall sharply?
The NSE attributed the sharp drop in cash marketto erroneous orders, which resulted in multipletrades at low prices.
"The market circuit filter got triggered due toentry of 59 erroneous orders which resulted inmultiple trades for an aggregate value ofover Rs. 650 crores
How long was trade affected?
Spot trading was halted on the NSE for 15minutes from 9.50 a.m. to 10.05 a.m.
Trading was not stopped on the BSE.
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Who was to blame?
A single dealer terminal at Emkay placed 59
erroneous orders for an institutional client,
resulting in trades worth over Rs.650 crore.
Emkay, a financial services firm founded 17
years ago, had closed out all the positions
from the misplaced trades
the firm had been "disabled" from trading
Emkay Global shares plunged 10 per cent.
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Impact of Freak Trade
Retail investors
The stop losses for a lot of intraday calls weretriggered, so retail investors who trade daily have
suffered losses. A lot of margin calls triggered. Individual stocks
All Nifty-50 stocks plunged during the freak trade.For example, Reliance Industries shares plunged20 per cent to an intra-day low of Rs. 682.However, individual shares also recovered withthe Nifty.
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What is SEBI doing?
Ordered a probe into the crash.
Examination of safeguard mechanism.
Examination of the role of technology in trading.
Introduction of a small-duration trading pause
Annulment of orders
Framework of dynamic trade based price checks
to prevent aberrant orders
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Literature review
Fama (1991)notes, market efficiency is a continuum.
Huiwen Zou (2011) Optimal information efficiency of astock market can ensure high effectiveness of the stockmarket
Xiqian Zhao, Juan Yang, Lili Zhao and Qing Lithemovements of stock market are influenced by the newsrelated with world events in the New York Times.
Mitchell and Mulherin point out that the number ofDow Jones announcements has a direct impact onseveral kinds of securities market activities
Tetlock use news articles from the Wall Street Journalto measure the interaction between the media and thestock market.
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Research Methodology
Research Objectives
To test the semi-strong efficiency of Indian
capital markets.
To examine implications of freak trade
To understand the risk-management systems
in stock markets
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Research Methodology
Research Design
Exploratory and descriptive in nature to provide insights andunderstanding.
Data
Secondary data published by NSE has been used.
Time Frame
5thOctober 20115thOctober 2012
Data Source Data has been collected from the following data sources:
http://www.google.com/finance
http://www.nseindia.com
http://www.google.com/financehttp://www.nseindia.com/http://www.nseindia.com/http://www.google.com/finance8/12/2019 Efficiency in Indian Stock Markets
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Research Methodology
List of Companies: Total 13 SBI
Axis bank
Cipla
HCL
Tata Motors Airtel
ITC
HDFC
Reliance
HUL
L&T
Sesa Goa
Infosys
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Calculations
Step:1
One year data of closing prices and index values for
13 companies from http://www.google.com/finance
Step:2
Calculation of Logarithmic functions for
Market return (X)
Securities return (Y) Step:3
Calculation of Alpha and Beta
http://www.google.com/financehttp://www.google.com/finance8/12/2019 Efficiency in Indian Stock Markets
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Calculations
Step:4
Application of Single Index Model to calculate
Normal returns
[Rt= a + brmt+ei ]
Step:5
Calculation of Abnormal Returns[Actual returnsNormal returns]
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Analysis
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Findings
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Conclusion
Flash crashes, nationally and internationally, havebeen common in the past.
From the Black Monday of 1987 to till date whereUS-based Knight suffered a loss of $440 millionafter its rogue algorithm caused majordisruptions in shares prices of 148 companies onthe NYSE.
The month of April earlier in the year witnessed
drop of Nifty futures over 300 points after stoplosses got triggered. The same day shares ofInfosys also witnessed a momentary drop of 20%
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This incident has raised doubts over the risk
management system and exposed the shallow
depth of the country's stock market.
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References
http://www.allstocks.com
http://usatoday30.usatoday.com/money/perfi
/stocks/2011-08-10-volatile-markets_n.htm
http://seekingalpha.com/article/580701-are-
stock-markets-becoming-more-volatile
Introduction to Corporate Finance: Laurence
Booth W. Sean Cleary , Chapter 10Market
Efficiency, Prepared by Ken Hartviksen.
http://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://seekingalpha.com/article/580701-are-stock-markets-becoming-more-volatilehttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htmhttp://usatoday30.usatoday.com/money/perfi/stocks/2011-08-10-volatile-markets_n.htm8/12/2019 Efficiency in Indian Stock Markets
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THANK YOU
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