Efficiency Test in US Stock Market

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Efficiency test in US Stock MarketDiscuss the concept of stock market efficiency with reference to the Efficient Market Hypothesis(EMH) and its application to the US stock market. Using daily closing values of the S&P 500from January 2005 toDecember 2014, evaluate the presence of market anomalies and test theweak form of EMH. Explain the methodology used for testing (including parametric and non-parametric tests, randomness tests, and serial correlation tests) and present the findings. What dothese findings suggest about the efficiency of the US stock market and what measures can betaken to improve its efficiency?Word Count Requirement:2,000-2,500 words.

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IntroductionWe see a continuous momentarily variation instock prices or Indices (e.g.S&P 500, Dow Jonesetc)of a stock market in boththedirections.It is very difficult to anticipate the directionfor veryshort period of timeoritsvalueat an instance of time. Even it is difficult to estimate for longtime horizonbut we do with blunt degree of accuracy.With the help ofextensive research onhistorical data we can somehow find the trend and maturity value of Indexup to some extent.This tendency of stock market makes it highly volatile and risky for investment purpose.StockMarket Efficiency and market Anomaly havealwaysbeena majormatter of concern for investoras well as for researcher. A better understanding of both is always helpful to stakeholder fortakingcorrect decision and parking of capital in more efficient manner.The term “EfficientMarket Hypothesis (EMH)”has been widely used in stock market and extensive researches havebeen carried outin both developed andemergingmarket. In contrary of this, stock marketanomalyhasalsobeenobserved in different forms.Efficient market hypothesis (EMH)The market theory has been proposed by Eugene Fama in 1960. His theory states that it isimpossible to beat the stock market because at any point of time security prices reflect allavailable information in the market. Stocks are traded at their fair value. It is impossible to tradein under or overvalued securities. Investor can earn abnormal return only by way of speculationthrough investment in riskier securities. There are three type of EMH. First is the “weak” form ofEMH that assumes current stock price fully reflects all security related information. Historicalprice data has no bearing on the future movement of stock price and hence therefore it isimpossible to earn excess return with the help of technical analysis. The second is “semi-strong

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