Essays on the behavior of stock prices and market efficiency

Abstract

This study discusses the concept of market efficiency from the view point of some anomalies and the relation between stock returns and volatility. Market efficiency has two sides in financial economics. One is the degree of information reflection and another is fitness of pricing model. Information reflection is divided into two parts, i.e., the speed of information resolution and the scope of information. Chapter two deals with the speed of information resolution and chapter three and four discuss the scope of information from the viewpoint of anomalies. On the other hand, pricing relations are examined in chapter five. In chapter two, the daily behavior of stock returns of six Pacific basin countries (Japan, the US and the Asian NICs) and their relationships are examined. An attempt is made to explain the results in terms of institutional characteristics of the stock markets and their interrelationship. And, using two traditional tests and the information-theoretic approach, market efficiency in the weak form is tested. Particularly, Markov chain models are developed and tested in order to determine the exact order of the stock return process. All the results are consistent with institutional characteristics, and market efficiency in the weak form does not hold except for in the US market. The third chapter focuses on new evidence found in the day-of-the-week effect in Korea. When the entire sample period is divided into two economically distinct subperiods and the sample stocks are divided into five size portfolios, results different from those found in previous studies are obtained. The results vary according to market status, i. e., bullish or bearish. Thus, it may be inferred that investment decision making by market status is required for rapidly developing stock markets. The next chapter examines the Monday effect in nineteen major stock markets and extends the study of JWM(1989). An information hypothesis is suggested for return behavior on Monda...