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The Study of Market Efficiency Based on DJIA Statistical Analysis

Author: YangBo
Tutor: LuoHan
School: Hunan University
Course: Probability Theory and Mathematical Statistics
Keywords: Efficient market hypothesis Behavioral finance DJIA Market efficiency
CLC: F830.9
Type: Master's thesis
Year: 2010
Downloads: 48
Quote: 0
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Abstract


Efficient market hypothesis is the cornerstone of the modern capital market theory. All other modern capital market theory developed on the basis of it or closely related with it. However, since the 80s from the 20th century, behavioral finance theory challenged the efficient market hypothesis. The challenges are mainly from two aspects:First, the theory aspect, questioning the three prerequisites of the efficient market hypothesis, that is investors with limited rationality, irrational investors are not independent, there is a risk in arbitrage; Second, the practice aspect, a large number of financial phenomena such as herding, small company effect, book value effect and loser winner effects and so on cannot be explained by the efficient market theory. However, behavioral finance theory has not formed a unified theory framework, lacking the basic core theory and the uniform assumption, and there is no uniform model of investor behavior.This paper argues that the new basic theory should be a comprehensive research of efficient market theory and behavioral finance theory, also the new basic theory should be based on the relax of rational people hypothesis in the efficient market theory and should be a theory closer to market realities, and the old theory as a special case should be included in the new theory.Based on this idea, we based on statistical analysis of DJIA index, study the detailed difference between the efficient market hypothesis and the real market situation. Based on these statistical analysis conclusions, we present a long-term, short-term investor behavior model and its change regulation. In this model, combined with statistical analysis of the data structure, this efficient market theory on the assumption that rational people do to relax, give a new long-term investors, rational, short-term investor inertia hypothesis. Based on this assumption, combined with the long-term macro-economic growth and long-term growth of the relationship between the stock market, this paper presents a new model of stock market volatility. Using this model, this paper gives an explanation of the realistic market fluctuations, while the efficient market hypothesis as a special case of this assumption is also included. Finally, this paper gives volatility model, designed for long-term excess return of a method of operation, using empirical data to illustrate the market is not fully effective, it also proved that the new assumptions in the interpretation of market volatility is more reasonable than the efficient market hypothesis.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Financial market
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