My CONCULUSION (Efficient Market Hypothesis)

My CONCULUSION (Efficient Market Hypothesis):

PART: 7 

Rational Expectations Hypothesis which is developed for the money economy is adapted to the financial markets as Efficient Market Hypothesis. According to this hypothesis, expectations in financial markets are equal to optimal estimates with the use of all available information in the market. As a result, according to this hypothesis, the price of an asset reflects all existence information which is related with the value of the asset. Therefore, the expected rate of return which smoothed according to risk will be equal for all beings are asserted. So whenever any one of the beings which has equal risk, provide a higher return, investors go towards to buy these beings.

We see that “it has been proposed to minor companies which have more (high) yield than major companies due to their higher risk basically“in S.BASU researches. For the reason that we can say about a company which try to get more profit, has to be considered the majority or minority. Moreover, in S.BASU research in 1983, it is defined that ‘shares of minor firms provide significantly higher returns than shares of major firms’ so amount of returns the company which is analyzed, is related to their size.

The other point is that Company has to decide how they will use their dividend because we know:

‘-Dividends is paid in cash to partners.

- Profit is never paid to the shareholders, kept in own of Company. Undistributed profits increase the value of the company because either this profit will invest for the projects of the company or it will transform into dividend which will pay to the shareholders in the next terms. ‘

As a result, using of dividend is very important for the companies.

The Criticisms of Efficient Market Hypothesis

The Criticisms of Efficient Market Hypothesis:

PART: 6

ü  At the beginning of the criticism, the future investor’s expectations have come to be homogenous in the market.

ü  The reason for the basic of the homogeny situations, all investors have same expectations.

ü  It is impossible that all the investors have the same expectations. If we assume that this is the case, different financial assets in the market can not be considered.

ü  A certain transaction value in the firm, it has to be accepted that investors do not have the homogenous expectations.

ü  Another criticism for Efficient Market Hypothesis is that it is related assumption to investment decisions of investors who have the rational knowledge.

ü  Rational assumption expectations have been criticized by many economists and all the investors don’t have the same function with rational motivations in the market.

ü  Heterogenic expectations principles are alternatively created instead of rational expectation theory. According to this principle, the future expectations of investors have to be different and away from the rationality.

ü  Efficient Market Hypothesis does not fully explain the functioning in today’s market. Nevertheless, it gives an information that how today’s market is away from the optimal situation.

Determination of Stock Prices (Efficient Market Hypothesis)

Determination of Stock Prices(Efficient Market Hypothesis):

"My summary for you"

PART: 5

Shares (Partner) certificates express the property belonging to a particular part of the company. The person who holds the partnership deed is eligible on future earnings (profit) of the organization which exports this deed. Shares are kept by Individuals, insurance companies, investment funds and pension institutions in their stock.

And generally, they prefer valued stocks below the real value

Real Value: The value of the stock which has to be.

Calculations for the value of a stock are done by using 3 models:

-  Dividend Model

-  Market value / book value model

-  Price / earnings ratio model

Dividend Models:

Dividend is a payment which is paid directly from the profits of the company to shareholders. Dividend, distribute through Net Profit as an annually result of the companies they have obtained and it is the benefit that to have the capital of shareholders in the companies.

A Company uses its profit by two ways:

- Dividend is transferred to the shareholders (Business partners) or Dividends is paid in cash to partners.

- Profit is never paid to the shareholders, kept in own of Company. Undistributed profits increase the value of the company because either this profit will invest for the projects of the company or it will transform into dividend which will pay to the shareholders in the next terms.

Dividends are distributed by including free of charge to increase the capital for new stock.

Price/Earning Effect Anomalies (Efficient Market Hypothesis)

Price/Earning Effect Anomalies (Efficient Market Hypothesis): "My summary for you"

PART: 4

This formula proves that how much money Investors have to pay for one unit of expected earnings.

And the formula is as below exactly:

Price / Earning Rate = Share Costs / Share Earning = P / E

Especially, Investors accept to pay more for profit per share of the enterprises which have high growth potential and brilliant future. Therefore, rate will be high. Rate will be changed Not only the company's profit increased but also increased or decreased demand for the company's share in the stock market as publicized.

S. Basu tried to define the relation between Price/Earning Rate and Stocks Returns as practical in one of his investigation in 1977. Efficient Market Hypothesis diverges from low Price/Earning Rate portfolios’ high return and higher systematic risk level in contradistinction to Capital Market Theory and Theory of Financial Asset Revaluation.

S. Basu investigated stock returns of the trading companies and relationship between firm majority and Price/Earning Rate at New York Stock Exchange in 1983. After then he proved that shares of minor firms provide significantly higher returns than shares of major firms. In his same research, majority effect almost disappeared completely when it is taken under control distinctions of returns, risk and Price/Earning Rate, was found.

In lots of expressions related with majority effect, it has been proposed to minor companies which have more (high) yield than major companies due to their higher risk basically.

Analysis of the Efficient Market Hypothesis: ‘Arguments about a company’

Analysis of the Efficient Market Hypothesis: ‘Arguments about a company’ 
(My summary for you)

PART: 3

Finance Researchers have been doing efficacy tests in a long-term period about the Efficient Market Hypothesis and they try to find the power that determines the prices of the risky assets and for this purpose,  they develops these models which shows the relationship between  the risk and the expected return rates. However, asset pricing model’s prediction results which try to explain the expected returns on risk-return relationship have been done but they couldn’t explain expected returns. Findings obtained in this type of works are inconsistent results to either asset assumptions of pricing models of Efficient Market Hypothesis or the principles of investment management. Therefore, we explain them as Anomaly.

Historical data of an asset is analyzed by diagrams and forecasting about the future is called Technical Analysis. Especially at the stock markets, it is possible that not to straggle from the effectiveness of weak form market. These kinds of deviations are in contradiction with the emergence results of efficient market hypothesis formulated is called Anomaly. There are different types of anomaly and in these anomalies; the test of the Calendar/Seasonal Anomaly is be one of the important tool to investigate to weak form efficiency of the market so we can see that Technical Analysis Method is not useful in the weak form market efficiency of Effective Market Hypothesis because of the anomalies.

Most of the investigations’ aims by examining anomalies are to get an idea about activity of market. The empirical findings which contradict Effective Market Hypothesis or Random Walk Model are called an anomaly. Anomaly is separated into main types which are Seasonal Anomaly (Depended of Time) or Non-Seasonal Anomaly (Non-Depended of Time). Some of the Seasonal Anomaly Types are ‘Intraday Anomalies, Anomalies relating to the days, Anomalies relating to the months, Anomalies relating to the Holidays, Anomalies relating to the Company Majority or Minority, Price/Earning Effect Anomalies, Dividend Profit Effect Anomalies…etc.