Testing the Market Efficiency of FTSE 100

CHAPTER 3: DATA METHODOLOGY AND HYPOTHESIS DEVELOPMENT

In chapter 2, the basic theories and previous reviews of literature has been illustrated by textbooks and journal articles. The research aim of this dissertation is to test the level of market efficiency of FTSE 100 index. In order to achieve this, event studies will be used as methodology and market model will be used to facilitate the process. Basically, three sections comprise this chapter. The first section will describe where is data come from. The second section, the procedures of achieving the research out will be illustrated.

Data collection

The author will conduct a research essay about testing market efficiency of British stock market by collecting data randomly from stocks listed in FTSE 100 Index in London Stock Exchange. First and foremost, to understand the research approach, research philosophy and research methods is essential.

Research Approach

By applying Collis and Hussey's (2003) research-type descriptors, this research study may be classified the study as follows:

Deductive: the author's study where theory will be developed from the collection and analysis of empirical data of listed companies occurring in the real financial market.

Quantitative: includes some numerical cross-sectional data to generate the final results.

Research Philosophy

The author will adopt positivism as research philosophy. The working area of my study is on the investment which belongs to a kind of natural sciences. And I use some existing theory to generate some new hypotheses (Saunders et al. 2009). In this dissertation, some previous research methodologies that has been used in testing stock market efficiency will be imitated and used.

Research Methods

For the sake of fulfilling the research approaches and abide by the research philosophy mentioned earlier, it was decided to design the quantitative research study to contain secondary research sources of data. Specifically, secondary sources include data and information that have already been published. Basically, the procedures of testing market efficiency are based on some numerical data and statistics including collecting the dates of different activities and the daily share prices.

The daily stock prices are collected to calculate some parameters and investigate how stock prices react to the different company-level events or activities. The motivation of choosing various company-level events or activities or news is to investigate whether various announcement of activities or news affect the abnormal returns. In other word, whether the new stock prices change in different rates (increasing rates and decreasing rates). Moreover, previous studies usually focus on testing the market efficiency of British stock market with data before 2007-2008 financial crises. There is possibility for conclude a different result of the level of British stock market efficiency by adding data from 2008 to date.

The data utilized in this study is secondary data, since it is initially collected due to some other purposes by other parties (Saunders et al).

In this study, daily prices are utilized. The prices were collected from http://finance.yahoo.com/ and DATASTREAM. The announcement dates of events were collected from official websites of each companies listed in FTSE 100. It is essential to preset ...