Assignment: 04 (Group)

Efficient Market Hypothesis and Financial Market of Bangladesh

Course Title and Code

Financial Institutions and Markets (F602)

Prepared for
Ms. Syeda Mahrufa Bashar
Assistant Professor
IBA, University of Dhaka

Prepared by
Name Batch Class ID
Manzur E Khoda 56D ZR 04
MahmudaAkter 56D RQ 07
N. M. Kaiser 56D ZR 08
S M JahedMeah 56D ZR 51
Md. Aliful Islam 57D ZR 50

MBA Program
Spring Semester, 2018
Institute of Business Administration,
University of Dhaka

March 15, 2018

Introduction of EMH

The efficient market hypothesis (EMH) is a hypothesis about markets in which prices of
securities reflect all information about the security. Information include all published and
unpublished information. There is no privilege group in the market who uses privileged
information to gain extra or unpublished information and apply that information to get better
return on asset. The asset will follow more of its intrinsic value if the market is efficient.
Market can absorb any new information almost instantly. If the absorption or dissemination is
not fast enough then market is not fully efficient. Markets that are less than fully efficient
open an opportunity for making excess profits because the inefficiency causes a mispricing
and let the knowledgeable traders make profit. If a security is slow to react and takes several
days to fully reflect new information, then buying that security immediately after good news
and holding it for a few days would generate extra profit. However, if many people know
about this inefficiency, they will all act the same way. As a result, the price will reflect the
new information more quickly and the inefficiency will eventually disappear The efficient
market hypothesis suggests that all information that has a bearing on market value of stocks,
bonds and other financial assets will be used to value those assets. An efficient market neither
wastes nor misuses information.

EMH in Capital Market

The EMH may be applied to capital markets. The present capital market efficiency is
primarily associated with either cost efficiency, or allocation efficiency. In general, an
efficient stock market is a market where stock prices reflect fundamental information about
companies. In such a case, the market value of the company changes in a way very similar to
that of the intrinsic or real value of a company. These changes are not consistent with the
value and do not restrain from trading financial assets. The differences in investor awareness
and uneven transaction costs prevent fundamental changes in value to be completely and
immediately reflected in market prices. However, if markets are efficient, changes in asset
prices cannot be reflected in valuation methods.
There are mainly three different forms of efficient market hypothesis. Those are being
discussed below:

1. Weak Form: The weak form assumes that prices only take account of historic price
movement.

2. Semi Strong Form: The semi strong form comprehend that prices take account of all
publicly available information, both historic prices and other.

3. Strong Form: The strong form of EMH assumes that prices take all accounts of
information, be it public as well as private.

Criticisms of Efficient market hypothesis

The concept of EMH is plagued by criticism from various professionals. The EMH
assumes that people acts rationally but in many cases trading securities, stocks, bonds etc.
investors acted irrationally. Irrational behavior has the real impact on market and this is
true for almost all types of markets including the financial market of Bangladesh.

EMH assumes that all investors perceive all available information in precisely the same
manner. The numerous methods for analyzing and valuing stocks pose some problems for
the validity of the EMH. If one investor looks for undervalued market opportunities while
another investor evaluates a stock on the basis of its growth potential, these two investors
will already have arrived at a different assessment of the stock's fair market value.
Therefore, one argument against the EMH points out that, since investors value stocks
differently and there is always components of emotion it is impossible to ascertain what a
stock should be worth under an efficient market.

Financial market of Bangladesh and EMH

Bangladesh has yet to reach the status of a developed country but the economy of the
country is considered to have a lot of potential. Bangladesh is considered a country with
frontier market which has the potential to emerge as a powerful economy. So naturally
academics are interested in finding out the applicability of various theories in context of
Bangladesh. To find out the efficiency of markets, various studies were conducted and are
still being conducted at this very moment.

The findings of these studies are summarized in the following points:-

1. If EMH were true for financial market of Bangladesh. Stock index is expected to be
random. But from empirical and statistical evidence this is clear that it is not true for
daily trading. Daily index is almost always non-random.
2. Financial markets in Bangladesh mostly the stock exchanges follows weak form of
EMH in the long run but not in the short run.
3. One of the reason proposed for non-randomness is due to the fact that many activities
in the market is related to each other and their buying or selling activities are
influenced by each other.
4. Other reason for this short term non randomness may be due to insider trading. This is
no secret that Bangladesh is one of the most corrupted country in the world. The
transparency condition in market is pretty terrible and there is no enforcement of
regulation since a lot of players in the market are politically connected. Powerful
players in the market can use various underhanded method to gain privileged
information and manipulate the market.
5. Another strong reason for this lack of efficiency can be attributed to the practice of
noise trading where amateurs trade on the basis of rumors or word of mouth without
analyzing financial information. Investors in Bangladesh generally don’t possess
adequate training or education to analyze all the available information. People flock
the market with various false assumptions.
6. Academics admitted that the data sets used in all the research are not proper in every
manner. Faulty data sets may contribute in the conclusion reached by academics. One
limitation of the research and the tendency of speculation by the traders has the same
root- the inadequate information infrastructure of the country where cost of acquiring
information is still high.

The 2010-11 Bangladesh share market scam was the ultimate result of these inefficiencies
piling up. This disaster wiped out a lot of lower tier traders from the market and nearly
crippled the country’s financial market.
Reference

1. https://www.bb.org.bd/pub/research/.../wp1614.pdf
2. https://www.fbs-du.com/
3. https://en.wikipedia.org/wiki/2011_Bangladesh_share_market_scam
4. www.iosrjournals.org/iosr-jbm/