evaluation of capital market efficiency using - journal-archieves17 ...

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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS
COPY RIGHT © 2012 Institute of Interdisciplinary Business Research
APRIL 2012
VOL 3, NO 12
opportunities that optimistic people lose because of the traditional models. So long as there is the possibility of
using arbitrage profit, the market will not be efficient and as long as there is discussions such …., There will be
such opportunities.
2. Literature
From the early twenties century, the beliefs of some of securities stock market agents was that the
historical study of prices contains useful information to predict future prices, so get with the price trend, changes
patterns are recognized and tells us that often special trend will happen. Believer of this idea called on Chartists,
because they focused on the charts ( Sinaie, 5:1373). The fundamental analysis was not required in this school
and its supporters believed that the history is repeated ( Fisher & Jordan, 635:1991).
From 1930s, other studies is started on the opposite views, the principal attention of these researches was
on the being random of prices behaviors, and that the prices don not follow special trend. The results of the
studies as an strong intellectual and the random behavior of prices was formed (Sinaie, 50:1993).
Through experimental tests, the random walk school through empirical test proved that successive price
changes in short term, such a day, a week or a month, is independent of each other (Fisher & Jordan, 635:1991).
After the 1960s, investigation of the statistical form of prices behavior led to the problem of economic
characteristics of the stock market, which in turn, led to random changes. This rise efficiency market idea (
Sinaie, 50:1992). Fundamentalists believe that an analysis of key economic and financial variables (actual value
of stock) can be rought into contribution (Fisher & Jordan, 635:1991). According to this belief anyone can not
gain return systematically more than the risk that accepted in long term. In such market, the stock price is a
reflection of related information and the price changes have not special approach and is not predictable ( Fadaie
Nejad, 7:1996).
Being an efficient market is very important, because being an efficient capital market, stock prices are set
properly and fairly in one hand, and the allocation of capital , which is the most important factor of production
and economic development, in other hand, done well and efficiency (Jahankhany & Abdeh Tabrizi, 7:1993).
Some financial economists have examined the stock market efficiency through the pricing mechanism of
arbitrage, return creation devices and then they investigated risk relationship with return in securities stock
market. They investigated the available patterns related to the process of return creation and risk relationship
with return and introduced different factors as exogenous variables. In the following section, the theoretical
model of pricing theory and also its test in Tehran stock security is investigated.
2-1. Providing the arbitrage pricing models
Arbitrage pricing theory is a new and different approach in determining of assets price and try to identify
out- of- market factors that can impact on the securities. This theory relies on the law of one price, i.e. we cannot
sold similar items with different prices in market. Risks associated with equity, arising from two sources. The
first sources of risk are macroeconomic factors on the property distributed in the market and you can not destroy
it with diversity. The second source of risk is the individual characteristic element. This element is unique to
each of the securities and pricing theory can create diversification in portfolio based on arbitrage. So in an
efficient markets, the risk is related only with systematic factors (macroeconomic), ( Vatshym & Paramur,
1997).
Introduction of arbitrage pricing model (APT)
Suppose that two-factor model explain the process of stock returns (Elton & Kraber, 372-369:1955).
Ri=ai + bi1 F1 + bi2F2 … +Fjei 2
ai , bi1 , … , bik are fixed values of securities ( bij can be interpreted as sensitivity of agent i to j; Ri= stock
returns; ei= error term with zero mean and fixed variance, and Fi represents the return of j factor ( to ease the
element of time has been deleted).
Supposed that co ( ei,ej)= 0 , co ( ei,fj)= 0, when i j, means that the error of any share or any phrase is
uncorrelated with the error of the share.
Investor who has a full range of portfolio, residual risk tend to zero and any systematic risk will be
important. In this case, only the terms in the equation will affect the portfolios systematic risk are bik, bi1.
So all of the investments and portfolios should be located on a page in bik, bi1 in The expected return space.
If portfolio be above or below the page, there will be an opportunity for arbitrage without risk. Arbitrage will
continue until the entire investments in a page are consistent. So risk balance equation and the return of a page
in expected return space and bin, bi1 are :
Ri=
It is noteworthy that financial report ( ) or increasing in expected return for all units is bi1. So ,
are the resulting return due to risk tolerance related to the first and nth factor. So, F is the same as financial
report.
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