Is market efficient testing of Hong Kong stock market Essay

Is mart efficient testing of Hong Kong seam market - Essay Example some(prenominal) tests could be used to test for market efficiency. The most common tests are for market anomalies such as the January, Day-of-the-Week, and Size Effects. An some other is to prove that any of the assumptions of EMH is not true for example, that there is a vogue of predicting stock prices so that those who are able to do so can earn above normal market returns. Practiti angiotensin converting enzymers of finance and economics who have studied stock market behaviour have proposed several hypotheses, single of which is the so-called Overreaction Hypothesis (ORH).ORH originated from the field of applied psychology and is a statement of behavioural prediction that muckle tend to overreact to dramatic news and events, regardless of whether these events are positive or negative. On the other side and related to this hypothesis is its opposite underreaction, a phenomenon that can also be considered. ORH p rovides a way of making decisions to buy and sell stocks, because if it is true, then some investors can earn above market returns by buying underperforming stocks and selling overperforming stocks, taking advantage of over- or under-reaction of other investors.The Hongkong economy has been identified as the one with the freest and, in the absence of artificial market barriers that cause inefficiency, therefore the most efficient financial markets, as it was given the highest Index of Economic Freedom1 (Heritage, 2006). This paper attempts to prove this by investigating whether the ORH phenomena exist in the Hongkong ancestry Exchange (HKSE).3. Investigate presence of ORH in HKSE for the period 1 April 1997 to 31 March 2007 using the methodology of Fung (1999) which is similar to DeBondt and Thaler (1985) but using the geometric mean, instead of the arithmetic mean, to reduce error caused by bid-ask dispense as pointed out by Conrad and Kaul (1993).Fama (1970) popularised the Eff icient Markets Hypothesis (EMH) which states that stock prices reflect all available