Efficient Market Hypothesis

By

[Date of Submission]

ACKNOWLEDGEMENT

My thanks go out to my family and all my friends who helped me complete this study and with whom this project may have not been possible. In particular, my gratitude my supervisor Chriss Lees and other staff members including Graham Sadlar and George for their extensive and helpful comments on early drafts. I am also deeply indebted to the authors who have shared my interest and preceded me. Their works provided me with a host of information to learn from and build upon, and it also served as examples that were helpful for understanding the and getting over the difficulties.

ABSTRACT

This research study is an attempt to explore the weak form market efficiency in the Indonesian capital market. Efficient Market Hypothesis is a theory of investment theory that says that it is not possible to beat the market as the efficiency of the stock market causes the current prices of the shares to always include and provide a reflection of all the information that is relevant. According to the Efficient Market Hypothesis, stocks are always traded on their fair value on their stock exchanges, and it makes it impossible for the investors to purchase the stocks that undervalued or sell the stocks that have inflated prices. This research has adopted a secondary quantitative method for studying what is the weak form of market hypothesis in the Indonesian stock market. The variables used for the regression analysis are daily returns and the stocks prices of LQ45 and IHSG stock markets of Indonesia and Jakarta. The findings of this research study have suggested that the during 2008 to 2011, both the stock markets LQ45 and IHSG have provided evidences that there is a significant relationship that prevails between the lagged returns (which is an individual predictor) and current returns (dependent variable) have been discovered on the equations of regression of both the indexes. The future returns can be predicted with a series of previous returns by using the equation of regression of LQ45 and IHSG indexes. They concluded that for the period 2008- to 2011, the weak form of market hypothesis does not prevail in the stock market of Indonesia.

ACKNOWLEDGEMENTII

ABSTRACTIII

CHAPTER 01: INTRODUCTION1

1.1 Background of the Study1

1.2 Summary2

CHAPTER 02: LITERATURE REVIEW3

2.1 Introduction3

2.2 Efficient Market Hypothesis3

2.3 Importance of Efficient Market Hypothesis4

2.4 Efficiency of the Capital Markets5

2.5 Categorisation of Empirical Tests for Market Efficiency7

2.6 Empirical Evidences8

2.7 The Weak Form Efficient Market8

2.8 Testing the Weak Form of Efficient Market Hypothesis9

2.9 Objectives11

2.10 Research Question11

2.11 Summary11

CHAPTER 03: METHODOLOGY13

3.1 Introduction13

3.2 Research Approach13

3.3 Regression Analysis14

3.4 Justification for Using Regression Analysis14

3.5 Hypothesis15

3.6 Secondary Research15

3.7 Justification for Secondary Research16

3.8 Problems Faced in the Research16

3.9 Summary16

CHAPTER 04: DISCUSSION AND ANALYSIS17

4.1 Introduction17

4.2 Synthesis and Critical Application17

4.3 Regression Analysis22

4.3.1 Regression Analysis IHSQ23

4.3.2 Regression Analysis LQ4525

4.4 Summary26

CHAPTER 05: CONCLUSION27

5.1 Limitations of the Research Study28

5.2 Recommendations for Future Research28

REFERENCES30

APPENDIX33

Appendix A: IHSQ33

Appendix B: LQ4549

CHAPTER 01: INTRODUCTION

1.1 Background of the Study

For the past three decades, investors have been interested in the behaviour of the stock prices. Over the period of time, the stock market ...