Efficient Market Hypothesis (EMH) and Statistical Event Study (2014)

The main aim of this research study is to carry out a statistical event study to evaluate the efficiency of the London Stock Exchange, the application of EMH, and the alternative explanation to the persistent abnormal returns. The Efficient Market Hypothesis (“EMH”) suggests that in an efficient form of the capital markets the fair value of an asset reflects all the available information and the expectations of the future prospects of an asset.

Given this hypothesis, the price of an asset factors in any information disseminated instantaneously and should not allow any abnormal returns due to the information asymmetry and the investor’s behavior. Efficient market hypothesis gives augment to econometric forecasting tests that reflect those assumed when calculating the optimality of a estimate in the perspective of a known set of data. Nevertheless, significant inconsistencies emanate from actuality and market efficiency tests depend on creating efficient trading conditions. For the purpose of our testing we will take Merger and Acquisition data from the London Stock Exchange from 2003-2013.

The primary reason for selecting the London Stock Exchange is that it is the oldest and considered to be one of the most active capital markets in the world. Efficient market hypothesis is a challenge for forecasting justification. In its raw shape, it efficiently says that sequence that one may like to calculate, the abnormal returns from share markets, are not possible to forecast. This is a respected theory, its most basic shape appearing some hundred years ago in the form of random walk theory.

This hypothesis was established empirically in 1960s and a lot of times since then. Quickly after the empirical substantiation attained, the efficient market hypothesis was put forward on the back of overriding judgment that if returns were possibly forecasted, numerous traders and investors would employ them to make unrestricted gains. The performance of stock market participants stimulates returns that follow the efficient market hypothesis; producing unrestricted riches, which can’t happen in a steady financial system.


  • 6,000 words – 38 pages in length
  • Good use of literature
  • Excellent analysis of subject area
  • Well written throughout
  • Ideal for finance students
  • This is an MSc project and not a dissertation

1 – Introduction

2 – Literature Review

3 – Research Methodology
Hypotheses
Standardized Abnormal Return (SAR)
Average Abnormal Returns for N firms
Cumulative Average Abnormal Returns (CAAR)
Market Value CAR (MVCAR)
T stats for Average Abnormal Returns
Event Study – Acquisition of HBOS PLC by Lloyds TSB Group PLC
Event Study – Merger of Glencore & Xstrata

4 – Discussion
Mergers and Acquisitions in LSE

5 – Key Findings
Joint Tests for Both Events

6 – Conclusion

Bibliography

Efficient Market Hypothesis Dissertation
Efficient Market Hypothesis Dissertation

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