[IS AUTOCORRELATION OF STOCK RETURNS DIFFERENT DURING BOOMS AND CRASHES]

by

ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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ABSTRACT

This paper empirically models US different companies stock prices. This paper provides a systematic review of the weak-form market efficiency literature that examines return predictability from past price changes, with an exclusive focus on the stock markets. Also the relation of stock with respect to the business cycles (Boom and Recession). Our survey shows that the bulk of the empirical studies examine whether the stock market under study is or is not weak-form efficient in the absolute sense, assuming that the level of market efficiency remains unchanged throughout the estimation period. However, the possibility of time-varying weak-form market efficiency has received increasing attention in recent years. We categorize these emerging studies based on the research framework adopted, namely non-overlapping sub-period analysis, time-varying parameter model and rolling estimation window. An encouraging development is that the documented empirical evidence of evolving stock return predictability can be rationalized within the framework of the adaptive markets hypothesis.

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION8

1.1 Purpose of the Study11

1.2 Research questions11

CHAPTER 2: LITERATURE REVIEW13

2.1 Size Effect17

2.2 Contrarian Strategy18

2.3 January Effect18

2.4 Fusion19

2.5 Efficient Market Hypothesis19

2.5.1 Strong Efficient Market Hypothesis20

2.6 Market Crash of 192921

2.6.1 The Conventional View of the Great Crash22

2.6.2 Strong Economic Indicators of Great Crash23

2.6.3 Events Precipitating the Great Crash23

2.6.4 Overview of the Issues and Events24

2.6.5 The Straws which broke the Camel's back24

2.7 Indexces and Boom and Crash26

2.7.1 The Dow Jones Industrial Average26

2.7.2 FTSE Index27

2.8 Major events and impact on the indices27

2.8.1 1998 Currency Crisis28

2.8.2 Burst of the Dot Com bubble28

2.8.3 DJIA29

2.8.4 FTSE29

2.9 The aftermath of 9/11 terrorist attack in New York30

2.9.1 DJIA30

2.9.2 FTSE30

2.10 USA subprime mortgage crisis of 200830

2.11 Listing Criteria31

2.11.1 DJIA31

2.11.2 FTSE32

2.12 Forecasts33

2.12.1 FTSE33

2.12.2 DJIA34

2.13 Inefficiencies within the Stock Market36

2.13.1 Rational Markets36

2.13.2 Complete Markets37

2.14 Information and Market Inefficiency: application of Theories37

2.14.1 Asymmetric Information in the Stock Market38

2.14.2 Expected Prices and Volatility40

2.15 Financial Markets: Liquidity, Arbitrage and Speculation41

2.16 Stock Market Efficiency and Managers43

2.17 Allocative Efficiency43

2.17.1 Efficiency Evaluation43

2.17.2 Technical Efficiency - Operational44

2.17.3 Efficiency Information44

2.18 Public Information in Stock Markets47

2.19 Liquidity in the Stock Markets47

2.20 Diversification of Risk48

2.21 Infrastructure Development48

CHAPTER 3: METHODOLOGY & DATA50

3.1 Data50

CHAPTER 4: RESULTS AND ANALYSIS53

4.1 Data Observations53

4.2 IBM - Boom58

4.3 IBM - Recession60

4.4 Wal-Mart Boom61

4.5 Wal-Mart Recession62

4.6 Bank of America Boom63

4.7 Bank of America Recession64

4.8 Boeing Boom65

4.8 Boeing Recession66

4.9 Simple cross-autocorrelation67

4.10 Across-ocean and cross-autocorrelation71

4.11 Directionally asymmetric cross-autocorrelation74

4.12 Autocorrelation vs. cross-autocorrelation77

4.13 Cross-autocorrelation stability80

CHAPTER 5: CONCLUSION83

REFERENCES86

CHAPTER 1: INTRODUCTION

The United States has had 20 stock market crashes in the past two centuries and most have been associated with recessions. Also, before 1933, many of these were associated with banking panics and severe financial ...