Efficiency in Indian Stock Markets

8/12/2019 Efficiency in Indian Stock Markets

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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 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/finance


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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/finance


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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.htm


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THANK YOU


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Efficiency in Indian Stock Markets

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