The efficiency of the securities market. The concept of the efficiency of the securities market. Checking for a strong form of GER

The effectiveness of securities is determined by: 1) dividend income; 2) dividend coverage; 3) the amount of income; 4) income per share; 5) the price of the share for income.

Dividend income DD is calculated by the formula

D D = (Rate of declared dividend (interest rate) · Nominal share price) / 100.

Hence the stock price is equal to the amount of the dividend divided by the interest rate and multiplied by 100.

Dividend income for the enterprise is determined in accordance with Form 12.2.

When calculating additional income from dividends for the entire period, column 7 is multiplied by the number of years of operation of the shares.

If the purchase (market) value of the purchased securities is higher than par, then the net income is reduced by the difference in price multiplied by the dividend rate and divided by 100%, and vice versa, if the purchase (market) value of the securities is below par, then the net income is increased by the difference in price multiplied by the dividend rate and divided by 100%.

Dividend coverage is an indicator of the company's ability to make long-term dividend payments. Dividend coverage characterizes the ratio of net profit to actual (actual) dividends:

Dividend Payment Security = Total Dividend Cover (of all issued securities) = (Net Income) / Dividend on shares, interest payments on bonds.

Form 12.2. Analysis of the company's income from securities

Name of securities	Cost of securities, thousand rubles	Income from securities
Period of use of securities, years	dividend rate for 1 year,%	Amount of dividend income for the year, thousand rubles	The amount of additional income for the year ( + ), thousand rubles (gr. 6--gr. 5)
purchased (market)	nominal	for the purchase price of shares ((column 1 ´ ´ group 4):: 100)	for the par value of shares ((column 2 ´ ´ group 4):: 100)
A
……………………..
…………….. etc.
Total for all types of securities

Table 12.2. Information on the results of the financial and economic activities of the open joint stock company for ______________________ 200__

End of Table 12.2

	Cost of goods sold	35 347 161	40 201 240
	Profit from ordinary activities	13 959 847	10 404 510
	Including:
3.1	from sales	13 662 078	1 009 101
3.2	from non-operating transactions, mln rub.	19 890	25 300
3.3	from other operations, mln.	277 879	300 100
	Taxes and other payments from profit, million rubles	4 025 252	3 220 260
	Net profit (line 3 - line 4) mln.	9 934 595	7 184 250
	Total accrued for the payment of dividends in this reporting period, thousand rubles	726 000	500 400
	Total dividends per share paid in this reporting period, thousand rubles
	Including:
	for a simple
	to a privileged nominal
	Dividends paid, thousand rubles
	for preferred shares	409 800	260 400
	683 600 = 409 800
	434 600 = 260 400
	for common shares	316 200	240 000
	510 620 = 316 200
	400 600 = 240,000
	Number of issued shares at the end of the reporting period, starting from the first issue, pcs.	1 220	1 200
	Including:
9.1	Simple nominal
9.2	Privileged registered
9.3	Simple to bearer	-	-

The costs of paying interest on bonds and dividends on shares are covered from net profit one to three times, which determines the safety of investments in shares and bonds and creates confidence that interest payments are secured, and the company has a sufficient margin of safety to ensure payments on valuable securities, i.e. on the investment.

Earnings per share are most commonly used to determine their price. It represents the income of the enterprise, whether declared as dividends or as income from each ordinary share of the enterprise, and is calculated as follows:

Earnings Per Share = Net Income Less Preferred Dividends / Number of Shares Issued.

The calculation of indicators is made according to the data of the report of the open joint stock company (see table. 12.2).

In the analyzed open joint stock company, the dividend coverage for all shares (Net profit / Payment of dividends) in the reporting year was 12.9 (9 362 278/726 000), in the previous year - 13.6 (6 782 610/500 400).

This means that interest expenses are covered in the reporting year 12.9 times compared to 13.6 times in the previous year, i.e. for 1 p. dividends on all shares accounted for net profit of 12.9 and 13.6 rubles. respectively. Dividend coverage on preferred shares is determined by the ratio of net income to dividends on preferred shares. According to the OJSC report, the dividend coverage of preferred shares in the reporting year was 22.8 (9,362,278 / (683 · 600)), in the previous year - 26 (6,782,610 / (434 · 600)). In this joint-stock company, about 50% of preferred shares were issued, i.e. coverage of preferred dividends by net profit was provided both in the reporting and in the previous period. The possibility of paying dividends on ordinary shares is determined by the formula

Dividend coverage of common stocks and bonds = (Net Income - Dividends on preferred shares) / Dividends on common stocks and bonds.

In the OJSC, the dividend coverage of common shares in the reporting year was 28.3 = (9 362 278 - 409 800) / 316 200, and in the previous year - 27.2 = (6 782 610 - 260 400) / 240 000.

The ratio (Market price) / (Income on ordinary shares) determines the ratio of the market price of shares and net profit (income) per share of 1 p. common stocks and bonds.

The ratio of the market price of a share and its book value is studied:

(Market price of a share) / Book value of a share;

The ratio of earnings per share to its market price;

(Earnings per share) / (Market price of one share).

If the company issues bonds for a long term, then this debt will be paid off in many years. Annual interest is a constant payment, and investors are exploring the possibility of paying it, i.e. analyze the efficiency of the use of borrowed capital.

In the process of analysis, the composition and structure of shares are studied in order not only to establish the ratio between securities, but also, first of all, to pay interest on bonds, preferred shares as priority payments, as well as to determine the amounts for dividends on ordinary shares. Shares are considered strong if the joint-stock company (enterprise) that issued them has the number of bonds and preferred shares much higher than the number of ordinary shares. However, if incomes grow disproportionately to the number of bonds or preferred shares, then the company will not be able to pay even the interest on the bonds.

Only net profit (profit of the reporting period and retained earnings of previous periods) can be spent on the payment of dividends. If the company is insolvent or declared bankrupt, the payment of dividends in cash is generally prohibited. Only dividends received by shareholders are taxed, and deferred dividends (retained earnings) are not taxed. This can result in businesses not paying dividends to avoid tax.

The reason for the introduction of such restrictions lies in the need to protect the rights of creditors and to prevent the possible "consumption" of the company's equity capital.

According to the Russian Regulation on Joint Stock Companies, the procedure for declaring a dividend is carried out in two stages: an interim dividend is fixed and has a certain amount; the final one is approved by the general meeting based on the results of the year, taking into account the payment of interim dividends. The amount of the final dividend per share is proposed for approval to the meeting. The amount of the dividend cannot be more than the recommended amount, but it can be reduced by the meeting. As for the fixed dividend on preferred shares, as well as interest on bonds, it is established when they are issued.

In many countries, the amount of dividends paid is regulated by special contracts in the event that the company wants to get a long-term loan. In order to ensure the servicing of such debt, the contract stipulates either a limit below which the amount of retained earnings cannot fall, or a minimum percentage of reinvested profit. There is no such practice in Russia; its remote analogue is the obligation to form a reserve capital in the amount of at least 10% of the authorized capital of the company.

12.5. Assessment of investment attractiveness
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An assessment of the investment attractiveness of a security must begin with a consideration of its issuer. A comprehensive assessment of the issuer is carried out in several stages:

1) assessment of the industry in which the issuer conducts its business activities;

2) assessment of the main indicators of economic activity and financial condition of the issuer;

3) assessment of demand for shares in the stock market;

4) assessment of the conditions for the issue of shares.

When assessing the investment attractiveness of investments in stocks, a number of indicators are used:

1. The level of return on equity and total share capital, determined by the value of the net profit from the capital used.

2. Indicators of the financial independence of the enterprise, the calculation method of which is given in Ch. 7.

3. Indicators of forecasting solvency for the future, financial results from the sale of products, goods, works and services, provision of non-current and circulating assets, own funds, profitability of sales, calculated on the basis of net profit.

4. The book value of one share, determined by the amount of own funds attributable to one share. The calculation of this indicator is carried out according to the formula

C a.b = K c / A,

where C a.b is the book value of one share as of a certain date; К с - the cost of own funds as of a certain date; A - the total number of shares of the company on a specific date.

5. Dividend coverage ratios, the calculation method of which is given above.

6. Coefficient of provision of preferred shares with net capital, determined by balance sheet equality (Assets - Liabilities = Net capital)

About p.a = K h / A pr,

where О п.а - ratio of provision of preferred shares with net capital; K h - the amount of net capital as of a certain date; And pr is the number of preferred shares of the company.

7. The level of dividend payments in relation to the valuation of shares in terms of value and percentage

K o.a = D a / Ts a

K o.a = (D a / Ts a) 100,

where К о.а - the level of return from the share,%; D a - the amount of the dividend planned for payment on the share in a certain period; Price is the price of a share for the period of its acquisition.

The opposite indicator (price-to-performance ratio) is also used, i.e. the higher the level of dividend payments and the lower the price-to-earnings ratio, the more attractive the shares are for their purchase.

8. Equity circulation ratio, which shows the volume of circulation of issued shares and is an indirect indicator of its liquidity. In foreign practice, this indicator is calculated based on the results of sales both on the exchange and on the over-the-counter stock market. It is calculated by the formula

KO A = OPR / JSC CPR,

where KO A is the share circulation ratio in a certain period; ODA is the total volume of sales of the shares under consideration at auction for a certain period; JSC - the total number of shares in the company; CPR - the average selling price of one share in the period under review.

Cash dividends can only be paid if the entity has cash in a current account or cash equivalents that are convertible into cash sufficient to pay. In theory, an enterprise can take out a loan to pay dividends, but this is not always possible and, moreover, is associated with additional costs. Thus, the company may be profitable, but not ready to pay dividends due to the lack of real cash. In conditions of extremely high mutual insolvency, such a situation is quite real.

The company's dividend policy is based on the well-known key principle of financial management - maximizing the total income of shareholders, the value of which for the past period is made up of the amount of dividends received. Therefore, when determining the optimal amount of dividends, the company and shareholders must assess how their value can affect the price of the company as a whole. The latter, in particular, is expressed in the market price of shares, which depends on many factors, for example, on the general financial position of the enterprise in the market for goods and services.

One of the indicators of the investment attractiveness of securities is the Dow Johnson index, which came into use in the last century. In 1884, Charles Doe added up the stock prices of two industrial firms and nine railroad companies and divided the resulting sum by the total number of companies. True, if you adhere to absolutely precise terminology, the word "index" is not quite suitable for Charles Doe's "invention", since it denotes a relative value.

Later, together with his partner Eddie Johnson, he began to regularly publish this index in the newspaper "The Wall Street Journal". Beginning in 1886, the average value was displayed for the shares of the 12 largest industrial companies, since 1916 - 20, and since 1928 - 30.

The US securities market is distinguished by the so-called split (split) of shares. For example, if a company issued 1 million shares, the price of which is $ 115. per share, then during the split, the company announces that its equity capital will be represented by 2 million shares at a price of $ 60. per share, and the total capital is $ 120 million. It is believed that round numbers are psychologically more attractive, and the revaluation can be made with some benefit to the corporation. However, the splitting of shares leads to inevitable distortions, and to eliminate their consequences, a special corrective divisor began to be calculated and published.

Currently, the Dow-Johnson indices are calculated and published for the 30 largest industrial firms, 20 transport companies (aviation, rail and automobile), 15 utility companies in America (gas and electricity, etc.), as well as a composite index for all of these 65 companies. It is believed that the index has become something of an indicator not only of the health of the US economy, but also of a large part of the world, because many companies are transnational corporations.

There are other, more representative stock indices.

Among them is the S&P 500 (Standard & Poo's 500), which includes shares of 500 companies (400 industrial, 20 transport, 40 utilities and 40 financial). This is an index in the full sense of the word: for each of the 500 companies, the product of the rate of issued shares is determined by their total number, then summarize the data for all companies and divide the resulting value by the same value in the base period.

The NYSE Composite Index takes into account the prices of all stocks on the New York Stock Exchange. AMEX Market Value Index reflects the dynamics of stock prices on the American Stock Exchange. The NASDAQ National Market System Composite Index is indicative of the state of the over-the-counter market passing through the computer network of the National Association of Securities Dealers. The Value Line Index is based on the geometric mean, and the Wilshire 5000 covers not only shares listed on the American Stock and New York Exchanges, but also a significant part of OTC turnover.

A wide variety of indices can be found in financial bulletins, not only for stocks, but also for other types of securities. Experience shows that changes in stock prices are often followed by ups and downs in production. In order for the forecast of the dynamics of exchange rates to be more reliable, it is supplemented by an analysis of a whole system of other indicators: the growth rate of the gross national product, the dynamics of orders for equipment and new construction, changes in prices for consumer and industrial goods, interest rates and the level of employment.

Information efficiency is a key factor that can improve the quality of resource allocation in the economic system.

The market is most effective in relation to the information received if this information entails an instant and complete reflection on the price of assets, which makes this information useless for extra profit. But not every financial market is information efficient.

Depending on the degree of reflection in the course of the security and information about it, different degrees of market efficiency are distinguished. It is considered that the market has a weak degree of information efficiency if the dynamics of rates over the past period does not allow predicting the future value of the price and, consequently, decisions to buy or sell securities made on the basis of technical analysis methods, which does not systematically obtain a level different from the market average. profit.

The market has an average form of information efficiency if all publicly available information of an economic, political and corporate nature does not have any predictable power and its use in fundamental analysis does not allow making a profit above the market average. With weak information efficiency, the market loses its attractiveness for small traders due to the lack of opportunities for large investments in the long and medium term.

In an information-efficient market, investors, based on the company's fundamental indicators, can make a reliable assessment of the impact of the information flow of events on the profitability of a security. Also, in an information-efficient market, the expected return inherent in the price of an asset correctly reflects the expected risk, which is an important factor for investors when making financial investments.

Although the market strives for efficiency, it is not always the case. One of the reasons why markets can be informationally ineffective is the absence of the minimum required number of investors who constantly analyze information and make transactions in accordance with the results of the analysis, thereby bringing prices into agreement with the incoming information. As a rule, these are investors who believe in the inefficiency of the market and, therefore, strive to receive returns in excess of those that correspond to the risk of these assets, that is, they seek to maximize the expected benefits. The more such investors are on the market, the more efficient it is. And a large number of aggressive investors trying to immediately bring the price of an asset in line with new information means more trading volume. So the efficiency of the market grows with the growth of volumes.

Other reasons for market inefficiency can be the presence of transaction costs, taxes and other factors, such as inadequate legal frameworks that impede transactions. Another reason why the market is ineffective is the inaccessibility of information to all market participants at the same time and its receipt is associated with any costs. Although information of any type is not taken into account by the market immediately after it appears in the market environment, there is always some time interval before this information is recognized by the market, which in turn will be reflected in the price of the asset. By that time, new information may appear, as a rule, private, affecting the price again after a certain period of time, but available to a limited number of people in order to get them more profit.

To determine the inefficiency of the market, a lot of research has been carried out on the part of academic economists. One of the methods for determining information inefficiency is the construction of a regression equation for predicting the price of a stock instrument. If the regression equation turns out to be statistically significant, then it is concluded that the stock market is ineffective, i.e. share prices on each subsequent day will depend on the prices on the previous trading day, and will not change after new information about the issuer arrives on the stock market.

The second way to determine the inefficiency of markets is the method of non-parametric statistics. According to this method, depending on whether the share price increases or decreases in comparison with the previous value, the increments of the absolute price values ​​in the time series are replaced by plus or minus signs.

The third method for determining information inefficiency is based on measuring the correlations between the yield of securities and the information flow over a certain period of time. Based on the results of the above methods, the presence of a weak trend towards a positive correlation in the yield of short-term securities is revealed.

For the development of the stock market in Kazakhstan and increasing its information efficiency, the following directions are required:

Increasing the level of market liquidity;

Increasing the level of information transparency;

Increasing the level of protection of investors' rights.

Today, almost all existing brokerage companies provide information database services, but it should be noted that this service is mainly aimed at institutional investors. Bloomberg is one of the leading providers of financial information for professional participants in the financial markets. The main product is the Bloomberg Professional terminal, through which you can access current and historical prices on almost all world exchanges and many OTC markets, the news feed of Bloomberg and other leading media, the electronic trading system for bonds and other securities. Information agency "Irbis" provides information only to professional participants. First, the cost of getting access to the information database is very high and several times higher than the monthly profitability of an individual investor. Secondly, the content of the information provided plays a role. As a result, there is practically no information base on the Kazakhstan market that can provide information within the limits of affordable costs for an individual investor. Hence the need to open an information center, providing information to investors and interested parties, not only on the financial statements of the listing company, but also providing a complete fundamental analysis.

The creation of this center will solve a number of problems. First, it will improve the quality of investment. Secondly, it will help to assess the quality of management and the qualifications of the portfolio manager on the part of shareholders, as a result, the level of trust in investors and the level of corporate governance will increase. And finally, this center will be an additional source of income for the exchange. At the same time, it is not recommended to create a center on a 100% paid basis. For the availability of such information to individual investors, you can provide a ranked price depending on the amount of information provided.

Since new information is quickly reflected in price in an efficient market, the current price of an asset reflects all the information already available. Consequently, the current price of an asset is always an unbiased estimate of all information related to a given asset, including the expected risk of owning that asset. Therefore, the expected return implicit in the price of an asset correctly reflects the expected risk. It follows from this that in an inefficient market, current prices are not always fair, and change not only under the influence of new information.

In conclusion, I would like to quote from the work of Z. Bodie, A. Kane and A. Marcus: "An overly doctrinaire belief in efficient markets can paralyze an investor and create the impression that any research activity is meaningless."

The presence of a weak form of efficiency of the securities market has been proven quite convincingly. Any information that could be extracted from the analysis of past quotes is reflected in the stock price. Many investors - supporters of the efficient market hypothesis believe that it is advisable to use passive methods of portfolio management, since active management is associated with significant material costs. Consequently, even in the presence of an efficient market, the investor must constantly expend efforts aimed at building a diversified portfolio of securities.

Literature:

1. Information efficiency of the market - /studyfinance.ru/

2. G.V. Dyadenko. Evolution of the form of information efficiency of the Russian stock market / Journal of Economics and Mathematical Methods.

3. Theoretical aspects of information efficiency of financial markets. /bibliofond.ru/download_list.aspx?Id=482789

4. "Hypothesis about market efficiency". /www.aton-line.ru/study/manual/

5. Fedorova E.A., Ph.D., associate professor. Statistical modeling of the assessment of changes in the efficiency of the stock market and its practical application / Journal of Audit and Financial Analysis / - 2009

6. Brigham Y., Gapensky L. Financial management: a complete course: In 2 volumes / Per. From English. Ed. V.V. Kovaleva. / - 1997.

Within the framework of the neoclassical approach, there are two concepts of market efficiency, representing the quality of the stock market from different angles. This is, firstly, the concept of the market of perfect or imperfect competition. The criterion of efficiency is the nature of competition and the conditions for maximizing profit arising from it. In accordance with this concept, the securities market (SM) refers to markets of imperfect competition.

And the second neoclassical concept is the market efficiency hypothesis formulated by E. Fama. The criterion of efficiency here is the quality of pricing based on the accounting in the price of financial assets of information that is important for its formation. In this case, it is sometimes said about the information efficiency of financial markets. However, this is a simplified interpretation of the market efficiency hypothesis. The type (nature) of information, namely: past (historical) prices, or public (public), or private, which the market operates and which underlies the formation of prices, is a criterion for highlighting the degree (or form) of market efficiency. But the criterion of an efficient market is precisely the quality of pricing: the compliance of the market price with its internal (or fair) value, the condition for achieving which is the complete and instantaneous reflection in the price of all information that is important for its formation. The information mechanism of pricing is a condition for the implementation of effective pricing of financial assets.

The balance of supply and demand can be achieved both in a market of imperfect competition and in a market that is not efficient within the framework of the neoclassical hypothesis of its efficiency. Within the framework of the latter, the stock market, like the financial market as a whole, appears as a market with information asymmetry. And market efficiency refers to the efficiency of the pricing of financial assets. In relation to the stock market, this is the efficiency of securities pricing, i.e. property rights (or institutions).

Within the framework of the institutional approach, the concept of an efficient market is based on minimizing transaction costs as the price of transactions that underlie the mechanism for pricing goods. Transaction costs are, in institutional terms, the prices of market imperfections 17. The qualitative criterion of market efficiency is the non-personalized nature of the exchange. Transaction costs equal to zero would mean the existence of a perfect market, (i.e., a market of perfect competition) and, at the same time, would mean, in accordance with R. Coase's theorem, an efficient allocation of resources in conditions of clear definition of property rights, the redistribution of which could not change distribution of resources in the economy.

Thus, the efficiency of its institutional mechanism is placed at the center of assessing the efficiency of the market, i.e. the ability of institutions to provide efficient pricing based on a level playing field and minimizing transaction costs. In this context, the approximation to market efficiency in the understanding that the institutional approach provides is a necessary condition for achieving its efficiency within the framework of various concepts of the neoclassical approach.

“Economic actors possess incomplete information and develop subjective models as a tool of choice. Transaction costs arise from the fact that information has a price and is asymmetrically distributed between the parties to the exchange. As a consequence, the result of any actions of the players on the formation of institutions with the aim of restructuring relationships will increase the degree of imperfection of markets ”18. Consequently, the degree of efficiency of the financial market has quantitative characteristics. These are, first of all: the level of transaction costs in the economy for attracting investment; the level of costs of functioning of financial markets; the level of costs of financial transactions of economic entities both in the open market and as a result of their internalization within the framework of integrated corporate structures. In other words, "the efficiency of an economic market can be measured by the degree to which a competitive structure, through arbitration and effective information feedback, imitates or approaches the conditions of a structure with zero transaction costs."

This understanding of market efficiency makes it possible to substantiate from a new perspective the formulation of the problem of stock market efficiency at the macroeconomic level, which is traditionally analyzed in terms of overvaluation, the emergence of “market bubbles” and cross-border capital movements due to the different quality of asset valuation in national markets. In addition, the dependence of economic growth on the quality of functioning of an institution such as the RZB and the efficiency of pricing for its assets is also in line with this methodological approach and in the focus of applied analysis of the process of financial globalization.

Foreign researchers measure the opportunities for economic growth of countries by examining how industry (its composition and structure) is valued in global capital markets using the price-earnings ratio (P / Eratio) in global portfolios of industrial enterprises and their stocks. Study 20 authors conclude that exogenous growth opportunities predict future changes in GNP and investment in most countries. This is most evident in countries that have liberalized their capital accounts, securities markets and banking systems. A study of periods of sustained rapid growth in the prices of stock market assets in the United States over 200 years showed that they occurred during periods of rapid economic growth and productivity, and even ahead of them. Two periods were distinguished by particularly high rates of growth in market prices: 1923–1929. and 1994-2000. Based on an assessment of the relationship between the growth in asset prices on the securities market and such fundamental factors as growth in real GDP, productivity, price levels, money and credit markets, it was concluded that the ups (“booms”) in the securities market are due to fundamental factors and real economic growth. While there is no consistent relationship between inflation and rises in SMEs, the latter tend to occur when money and credit market growth is above average. 21 This study, based on the significant data history of the developed US RZB and, most importantly, on modern data on the last period of an unprecedentedly long period of US economic growth in 1993-2000, reaffirmed the deep relationship between the growth processes in the market economy and the RZB, moreover, the steady rise in prices for securities market plays an indicative role, since it is of a leading nature and reflects real processes in the economy. However, one should not rely only on the readings of the stock index, especially on a specific period of its advance when forecasting economic dynamics. Only a group of macroeconomic indicators should be used in forecasting, while the variability of the time lag and time parameters of a particular cycle significantly reduces the potential quality of quantitative forecasts of the dynamics of economic cycles.

There are various ways to determine whether stock prices are overstated or understated at the macroeconomic level (similarly for individual securities). Among them are the ratios: P / Eratio, the ratio of the market value of shares and book value (P / BV), the ratio of the total market value of equity capital (capitalization) to some aggregated indicators, for example, the value of the gross national product (GNP) or the total replacement cost of capital ... The deviation of the current value from the average (or moving average) over the long term can be regarded as an overestimation or underestimation by the market of stock prices in the economy.

At the same time, the stock mechanism for assessing the value of assets does not remove some of the problems and costs of measurement. Modigliani and Koch (1979) hypothesized that RZB suffers from a “money illusion” that devalues ​​real cash flows by discounting them at nominal discount rates. The monetary illusion hypothesis also influences the pricing of risky assets relative to those with low levels of risk. A simultaneous check by foreign researchers (2005), taking into account modern pricing data for treasury bills (that is, a priori risk-free assets), low-risk securities and high-risk securities made it possible to clear the “money illusion” of any changes in investor attitudes towards risk. The empirical results support the hypothesis that the stock market suffers from a "money illusion." 22

Whether this stock pricing mechanism is related to the degree of market efficiency, or is it a consequence of the institutional characteristics of the market's valuation of assets - this is the problem posed by these results of empirical research.

A "market bubble" in the stock market means the excess of market prices of shares over their fundamental (intrinsic) value. Investors' expectations for higher prices and their belief in limited short sales lead to persistent overpricing of stocks relative to their fundamental value 23. The presence of such a “market bubble” causes reciprocal new share issues, placed at these inflated prices, which leads to an increase in the Tobin coefficient (Tobin's Q) and causes, in turn, paradoxical as it may seem, an increase in real investments. Empirical confirmation of the key position of the theoretical model of such a relationship has been obtained: with the growth of expectations of price increases, the volume of new emissions, the Tobin coefficient, and real investments increase. Thus, the “market bubble” is formed under the influence of investors' expectations and imperfect restrictions on the speculative game based on short sales, and is supported by the response of the real sector - the offer of securities at overpriced prices and the growth of real investments due to the resulting underestimation of real assets. Since these consequences for a certain time, obviously, are positive in the real sector and cause an increase in the market capitalization of companies, objectively conditioned by the growth of investments, the existence of a “market bubble” is supported for some time by this mechanism of direct and reverse links between the stock market and the real sector of the economy.

Consequently, the emergence of "market bubbles" is explained by reasons of a systemic nature: both the expectations of investors and their role in pricing, and the quality of the functioning of the market mechanism (its distortion), as well as the underestimation of real assets, which causes an increase in real investments and stimulates the purchase and growth of prices of real assets as a feedback mechanism.

Revealing the institutional peculiarities of the RZB as a market with information asymmetry and the difference in the level of transparency of the market and the firm also makes it possible to explain some of the effects and asymmetry of direct and portfolio investment flows as institutional effects caused by the specifics of this market. In this aspect, foreign direct investment is characterized by a management style that enables the owner to obtain relatively accurate information about the firm's performance. This superiority over foreign portfolio investment comes at a cost: a firm owned by a relatively well-informed strategic investor has a relatively low resale value due to this type of information asymmetry (known as the 'lemons' market). This comparative model of direct and portfolio investment based on information asymmetry can explain several facts related to foreign capital flows, for example, the relatively higher foreign direct investment / foreign portfolio investment (FDI / FPI) ratio in developing countries compared to developed ones. and also the lower volatility of net imports of direct investment compared to net imports of portfolio investment 25.

New conclusions make it possible to draw an institutional approach to assessing the efficiency of the stock market in relation to its impact on the investment structure: the quality of the assessment of market assets determines the priority forms of direct investment. Firms carry out foreign direct investment either by investing in lucrative projects or through cross-border takeovers. Cross-border takeovers are undertaken by firms with heterogeneous corporate assets to exploit their complementarity, while foreign direct investment in manufacturing projects involves setting up production in a foreign market. Effective foreign direct investment in manufacturing projects and cross-border takeovers coexist, but the structure of foreign direct investment varies. Empirical studies have shown that firms that invest directly in new production are systematically more efficient than those involved in cross-border acquisitions. Moreover, most foreign direct investment takes the form of cross-border takeovers, where the price differential between countries is negligible, while investment in manufacturing projects is more important for foreign direct investment from high-income countries to low-income countries. 26.

Interaction with other institutions of the financial system can modify the mechanism of functioning of the stock market, influence the degree of its efficiency, the quality of implementation of its functions, and the development of its institutions.

In particular, the existence of taxes as an institution of economic activity affects the value of the real disposable income of economic entities. The acquisition of assets for the purpose of building tax protection schemes leads to an increase and overvaluation of the market prices of these assets. The result is often inefficient allocation of resources, which manifests itself in the "market bubbles" of the stock market, real estate market and other markets. Moreover, the restoration of the correspondence between the market price and the fair "intrinsic value" of assets occurs often in a crisis form. Depending on the degree of involvement of institutions and subjects of different markets in the process of "erosion" of existing institutional restrictions, the crisis can cover a number of markets and result in a crisis of the financial system, as well as the economy as a whole. This, in turn, can lead to a change in the phase of the business cycle or a change in other quantitative and qualitative characteristics of its dynamics.

Generalization of these theoretical provisions leads to a number of conclusions:

Financial institutions as norms of economic activity can lead to allocative market inefficiency.

The deformation of the mechanism for the distribution of resources in the economy can manifest itself in the ineffectiveness of pricing in the stock market, an increase in transaction costs in the financial and economic system as a whole, and crises as a method (mechanism) of self-regulation.

Crises in the economic (including financial) system, on the one hand, are an indicator of the inconsistency of the institutional system of the economy (or its individual sectors) with the goals and mechanism of its functioning, and on the other hand, lead to the forced restoration of the efficiency of pricing, as well as to a change in institutions. (norms) at all levels of the system.

The efficiency of the stock market is determined by the level of its development as a market institution and interaction with other institutions of the economy.

High transaction costs are an inherent feature of emerging markets. One of the most obvious manifestations of market imperfections is significant differences in the price of the same product, and hence the possibility of arbitration. The price volatility of the spot market (current, cash market) increases the uncertainty of the markets in the future. But the opposite is also true: the uncertainty of the future state of the market affects the volatility of the current market conditions. It follows that institutional changes that reduce uncertainty in the future, as well as create a mechanism of interconnection (adequate response) between the current and future state of the market, that is, the creation of risk distribution institutions, is a factor in increasing the efficiency of the market, both from the point of view of the neoclassical approach, and and an institutional approach (reducing transaction costs as payment for imperfect markets).

Empirical research on the efficiency of the Russian stock market is based on the Market Efficiency Hypothesis (EMN). The concept of market efficiency occupies an extremely important place both in financial theory and in practice. The Capital Assets Pricing Model (CAPM) shows how important information about future payments is in determining asset prices. In general, it is assumed that investors in the market have different information about the future flows of payments for shares (financial assets). Equilibrium in the market under rational expectations is that prices aggregate all available information. According to E. Fama 27, the market is efficient. if market prices fully and instantly reflect all the information relevant to their formation.

E. Fama identified 3 forms (degrees) of market efficiency. The market has a weak form of efficiency (wear-form), if the dynamics of rates over the past period does not allow predicting the future value of the price and, therefore, decisions to buy or sell securities, made on the basis of technical analysis methods, do not systematically obtain a different from normal ( mid-market level) profit.

The market has an average form of efficiency (semistrong-form efficiency) of the market if all publicly available information (about factors such as inflation rates, money supply dynamics, interest rates, issuer's income, etc.) has no predictive power, and its use , including in fundamental analysis, does not allow you to extract profits above the market average from trading on the market.

Finally, a market is strong-form efficiency if all publicly available information as well as private information is fully reflected in prices. Therefore, in an efficient market in a strong form, the price of a security fairly accurately reflects its investment value (intrinsic, fair) 28. Thus, prices in an efficient market make it possible to assess the comparative efficiency of the activities of various industries and individual issuers and perform the function of regulating the flow of capital into the most effective areas of its application in the best way.

According to the theory, in an efficient market, past information is useless for predicting future prices, and the market should only respond to new (unexpected) information, but since this is by definition unpredictable, future prices and returns in an efficient market cannot be predicted (Fama). Thus, empirical research on market efficiency assesses whether the past available information allows predicting future prices, and whether there are factors (variables) in the past that affect current market prices.

Changes in the institutional environment have a direct and indirect impact on the quality of the stock market and its degree (form) of efficiency. Significant changes in the institutional structure in these periods increase the degree of market imperfection, as shown in the first part of the work, due to the increased costs of such restructuring. The efficiency of markets in conditions of high volatility of the institutional structure is unstable, since the market equilibrium in these conditions is also unstable. Therefore, the weak form of efficiency of the Russian securities market, identified by a number of authors 29 in the period 2000–2003, is not a stable characteristic in the medium and long term. It is the influence of institutional factors that brings the market out of the local, temporary equilibrium and violates the degree (form) of its efficiency. Therefore, the analysis of data at longer intervals reveals a violation of the form of market efficiency in certain periods. Thus, the conclusions obtained in the works of these authors do not fundamentally contradict the theoretical conclusions and the results of empirical analysis in the context of the institutional approach.

These transitions from one equilibrium state to another can be identified on the basis of one of the approaches to testing the efficiency of the stock market: using trading strategies as a mechanical filter for making trading investment decisions 30, i.e. based on the methods of mathematical statistics within the technical analysis of the securities market. If the use of this method allows you to systematically gain profit (level of profitability) from investment operations in the securities market above the market average, calculated on the basis of the dynamics of the stock index with a wide calculation base, then the market is not efficient within this time period 31.

We tested the form of market efficiency based on the analysis of the efficiency (profitability) of investment operations in the Russian stock market based on the use of various trading strategies, i.e. fixed combinations of statistical analysis methods to identify trend reversal signals for making investment decisions. The research was carried out on the basis of a ten-year series of daily observations of the RTS index (more than 2.5 thousand observations) from 01.10.1995 to 01.06.2005 and a seven-year series of daily observations of the MICEX index (1.75 thousand observations) according to the official data of these exchanges.

The analysis used 40 basic trading strategies included in the analytical toolkit of the professional software package "Meta-stock", which are based on combinations of various methods of mathematical statistics and the theory of probability 32. 20 strategies out of 40 tested give an opportunity to get positive profit. At the same time, 5 of them provide systematically in the analyzed period profitability above the average market level, calculated on the basis of the MICEX composite index and the RTS index. In accordance with the efficient market theory, this result refutes the hypothesis of the efficiency of the Russian stock market in the medium and long term (see Table 1) (and only in such periods it is conceptually possible to test the efficiency of the market 33).

The efficient markets hypothesis is related to the information efficiency of the securities market and assumes that the prices of instruments traded on the market, and, in the first place, ordinary shares, are edited by information available to the market. This happens when market operators believe that the expected information can change the investment characteristics of a stock (profitability, risk, liquidity). The receipt of such information does not directly affect the prices of the stock market, but the market operators who receive it, process it and make investment decisions. GoldmanSachs traders have determined that only 3% of all information available in the market for managers, investors and traders is meaningful. Consequently, it is initially important for a fundamental analyst to determine what information is significant, and use it in a model for predicting the future price of a stock, and abstract from the rest of the "information noise".

What information can be analyzed to give recommendations for certain assets? This is due to the level of development of the market, or rather to what information it manages to translate into changing prices. The identification of three forms of information efficiency of the capital market was proposed in 1967 by a researcher from the University of Chicago G. Roberts, whose work was never published. This idea was reflected in the 1970 article Efficient Capital Markets: An Overview of Theory and Empirical Research by Eugene Fama. Scientists suggested that it is possible to classify markets according to the degree of their efficiency, which is determined by the market's ability to objectively and correctly form the price, and proposed the following classification.

1. If the prices of securities reflect all information about their prices in the past, then the market has weak form of efficiency.

In such a market, investing in a particular asset, it is impossible to extract higher than the market rate of return using only information about the historical prices of assets. When the market knows only the past values ​​of the Blue Chip stock prices, and the financial analyst has access to the calculation of its true value, there is an objective opportunity to profit from this. In these conditions, fundamental analysis can be very useful, revealing the prospects for profit and changes in the yield of securities, and, therefore, indicating the presence of price anomalies.

2. Average degree of efficiency - semistrong-form efficiency implies that all publicly available information is fully reflected in the prices of securities. Operating on a market with a semi-strong form of information efficiency, it is impossible for an investor to systematically beat the market, using only publicly available information for trading decisions.

If fundamental analysis in such a market is carried out only on the basis of all known (public) information about the Blue Chip company, then the investor will most likely fail to make a profit. On the other hand, having experience, assumptions and some confidential information about this company, an analyst can use fundamental analysis models to determine the future price movement, and such recommendations can bring an investor superprofits.

3. With a strong-form efficiency market efficiency is absolutely all, even confidential information is already fully reflected in securities prices. Therefore, if the market has a strong form of information efficiency, then, operating on it, it is impossible to systematically, using all the information, including insider information, to extract excess profits.

In an absolutely efficient market, securities are always properly priced, and they do not need fundamental valuations. A strong form of market efficiency allows you to invest without using the recommendations of fundamental analysis to select certain stocks as an object of financial investments, because it is impossible to carry out operations on it, the net present value (NPV) of which would differ from zero.

Since the strong form in the efficient markets hypothesis is unprovable and empirically untestable, since testing it requires access to information from all insiders, the recommendations focused on the first two forms of efficiency.

This is especially significant, since the domestic securities market cannot be so effective initially, because none of the conditions for the efficiency of the stock market is empirically confirmed on it:

• an efficient market has a large number of operators;
• all capital market participants have access to all relevant information affecting exchange rates;
• any market operator competes freely and on an equal footing in the securities market.

Information and technological asymmetries in the Russian securities market create price anomalies. As new information arrives at random, the reaction to it, and the expectations of market operators, the dynamics of stock exchange rates, in turn, changes arbitrarily. The efficient markets hypothesis assumes that short-term movements in stock prices are unpredictable. Empirical studies indicate that in the domestic securities market, the amount of return can be much higher than the risk taken by the investor, but it can also be much less than the amount of risk inherent in a given investment. This difference between the actual return received and the investment's own return is called anomalous return. An anomaly can be obtained only if the securities are incorrectly priced, i.e. their prices do not match their value. An abnormal return occurs when the relationship between risk and return is violated, which means that higher risk investors demand higher returns. If the market were balanced, then there would be no anomalies, and the market would not be able to obtain returns other than normal.

For an analyst using fundamental analysis in his arsenal, it is useful to know the theoretical implications of the efficient markets hypothesis:

• 1. A market where all securities are always correctly priced is called an efficient market. An efficient market quickly forms an equilibrium price, and therefore it is impossible to obtain a profit different from the normal one (the profit of the market portfolio) in such a market. In an efficient market, prices reflect all important information and thus investors cannot find anomalies using this information.
• 2. In an efficient market, risk is rewarded, and investors with higher risk, on average, receive higher returns. The rate of return that investors receive in an efficient market matches the amount of risk they take. Normal return is the return on the market portfolio, i.e. the aggregate of all securities traded on the market.
• 3. In an inefficient market, there are price anomalies and anomalous returns that the fundamental analyst is looking for.
• 4. The price fluctuates impartially around the true value of the securities and the transaction is concluded at a fair price; information affecting price dynamics is quickly provided to all market operators
• 5. In an ineffective market, the owners of confidential information have a clear advantage over other operators. Even professional market participants, if they do not have access to the internal information of issuers, will not be able to regularly provide higher than the market average yield. To do this, they must be willing to take on above average risk.
• 6. In an efficient market, investments are always properly priced, the only thing that a reasonable investor can do without resorting to fundamental and technical analysis is to use an index investment model. A new investment technology has emerged from the efficient markets hypothesis: instead of choosing the shares of a particular company, the portfolio is built according to the model of a particular stock index, which includes shares of a certain financial market, a certain market segment, a certain economic sector or a certain region of our world.

NEED TO REMEMBER

An efficient market is a concept that exists only in theory, because existing securities markets are never in equilibrium due to the constant flow of information and other external factors.

The theory of stock market efficiency is what this article is about. When preparing this article, I tried to sort out the most key information on this topic as simply as possible. I believe that this topic will be useful for both active and passive investors. Especially this topic should be a revelation for speculators who use technical analysis in their activities.

The theory of efficiency provides a perennial subject for debate in the scientific and financial community. On one side of the barricades are pundits, and on the other are speculators and active investors in the stock market. The former argue that the market is efficient and it is foolish to try to beat it, while the latter are trying to prove the opposite. Which one is right? Let's figure it out.

Outline of the article:

What is market efficiency theory about?

The main question that efficiency theory is trying to answer is how efficient the market is, and whether there are ways to get returns that exceed market indicators.

There are many definitions of market efficiency, they look at market efficiency from different angles, focusing on one or another aspect of it. So let's take a comprehensive look at what market efficiency is.

Generalized definition

Market efficiency - all participants have free and equal access to information regarding investment opportunities. As a result, market participants can equally use the information obtained to identify the reasons that led the analyzed security to its market value, as well as to correctly predict its future dynamics.

Market efficiency with a bias towards quick adaptation to information.

Market efficiency - new information is instantly incorporated into the market value of a security. Market efficiency is about quick adaptation to new information.

True value

Market efficiency - the market value of securities is determined by market participants by assessing the true value of an investment.

Key Assumptions of Market Efficiency Theory

When developing the theory of market efficiency, the following assumptions were used:

• Information is distributed instantly, without any obstacles, it is free and available to all market participants at the same time.
• When making deals, there are no commission costs, taxes, or other factors that may hinder market participants.
• An individual participant in the securities market (individual or legal entity) cannot influence the general level of prices in this market.
• All market participants act to maximize their own benefits

Of course, any sane person understands that there is nothing ideal in the real world and the theory of market efficiency is no exception. The assumptions on which the theory is based cannot be fully realized in the real world. Information is not always free, and banal communication interruptions are quite possible. Concluding transactions on the stock exchange always entails commission costs, and one should not forget about the tax burden. Market participants really strive for maximum profit, but sometimes they act irrationally, which leads to disappointing consequences, the human factor has not been canceled.

Moreover, the assumptions of the theory of market efficiency given above, one might say, are closer to reality. There are also assumptions of the theory that are more divorced from reality, which greatly complicate its proof:

• Investors' expectations for future market prospects are uniform.
• All investors have the same investment horizon.
• The number of assets available for purchase is fixed and also infinitely divisible, which allows investments with surgical precision
• Investors can borrow or lend capital at a risk-free (0%) rate.
• The stock market is in a state of balance (equilibrium), the value of any asset reflects its inherent risk.

Well, in fact, you yourself understand everything.

Investors' expectations in relation to any asset are never uniform, the investment horizon for each investor is different (which is in agreement with the personal investment plan). The number of assets on the market cannot be fixed and even more so infinitely divisible. The 0% lending rate is out of the question even in countries where the key rate is negative, not to mention developing countries. Finally, the value of an asset sometimes inaccurately reflects the inherent risk for that asset.

Three forms of market efficiency

In order to make it easier to test the theory in practice, 3 forms of market efficiency were introduced: weak, moderate (semi-strong), strong. Each form evaluates market performance differently. But they have one thing in common - a comprehensive review and proof of the inappropriateness of the use of analysis methods that will lead to an investment return that exceeds the market average. Moreover, the analysis is carried out from the point of view of information efficiency.

Market information efficiency assumes that:

• Market participants compete with each other by analyzing and evaluating an asset independently, each in its own way.
• New information comes to the market in a completely random way
• Investors are trying to bring asset prices in line with the new information as soon as possible.

Competing investors

The asset price is brought in line with the new information only if there is a certain number of investors who are constantly analyzing and, based on the results of the analysis, conclude transactions. And the more such investors there are, the more efficient the market is. Accordingly, the market efficiency grows with the growth of trading volumes. One more conclusion follows from this. The market is efficient for liquid assets and ineffective for assets with low liquidity.

What assets can be called low liquid and which highly liquid? It's hard to say everything individually. But there is a category of assets that is generally low-liquid - tangible assets. Real estate is a good example for an investor. Therefore, speaking about market efficiency, most often we mean the financial market, and more specifically, the stock market.

The unpredictability of new information

Indeed, no one can predict:

1. New information
2. How will the new information affect a particular asset?

Fast adaptation

As I said earlier, investors try to bring the price of an asset in line with the information received as soon as possible. To do this, they invent or use already invented investment strategies. The more aggressive investors participates in the game, the higher the market efficiency. For example, the news that in a week the company will start releasing a new product line, which, in the opinion of its management, should increase the company's profits, will lead to the fact that today the market will react to this by raising its stock prices.

Speaking about information, it should be noted that it is divided into 3 types.

1. Historical data of the asset value
2. All publicly available data about the asset, including historical data about its value
3. Private (closed) information

So, depending on the form of the theory, both technical and fundamental analysis are criticized. The weak form of market efficiency attacks technical analysis, while the moderate to strong form attacks fundamental.

I suggest that you familiarize yourself with these diametrically opposed methods of analysis.

Technical analysis

Technical analysis is a method based on the theory of castles in the air.

What is this theory of castles in the air? This is the metaphorical title that Burton Melkil gave to the stock market frenzy in his book A Accidental Walk Down the Wall Street. This theory explains the pricing of securities. According to it, participants in the securities market, seeing growth, any company try not to miss the chance and buy its shares. This happens over and over again until there is not a single fool left who would like to buy shares of this company.

Why it happens? The growing wave of purchases, as it were, automatically pushes the stock price up. But the holiday ends when some stock market players realize that the rise in the value of shares cannot continue forever and they begin to slowly get rid of them. Following them, more and more people come to sobriety who also want to sell these "damned shares", albeit at a loss. The result of this game is that the price of a stock, inflated to the point of indecency, rushes lower and lower until it reaches adequate values.

The title “theory of castles in the air” very appropriately reflects the meaning of this theory. There is no logical basis and solid foundation behind the abnormal growth of a particular security, and when investors understand this, the locks that they built in their imaginations collapse.

The use of the theory of castles in the air is the lot of speculators only. Technical analysts only follow the dynamics of the price of a particular asset and try to guess the behavior of the stock exchange crowd. That is, technical analysis fully assumes that the behavior of market participants is determined by 90% by psychology and only 10% by logic (emotions rule the market).

Technical analysts assume that all the necessary information is already included in the current stock quotes. That is why they do not care at all about the activities of the company, be it a toothpick company, or a large concern for the production of CNC machines, or maybe a video game company at all. The main concern of the supporters of technical analysis is the figures that appear on the charts, as well as the readings of other indicators that are used in the trading strategy. In communication between two "technicians" you can come across expressions such as head and shoulders, double bottom, bear trap, moving average, stochastic oscillator, and so on.

When a particular figure appears on the chart, as well as readings of any indicator, the trader receives a signal to buy or sell a stock. The frequency of stock trading among traders varies from a few minutes to several days. That is, traders, as Burton well noted, seem to flirt with stocks, either by getting closer to them when buying, then moving away from them when selling. Also, technical analysis is similar to astrology. Only in astrology, events are predicted by the location of the stars in the sky, and in technical analysis, traders receive omens for a decrease or increase in quotations in the form of certain figures on the chart.

Fundamental analysis

As far as fundamental analysis is concerned, here, of course, the situation is different. Fundamental analysis evaluating the intrinsic value of a particular company is based on real facts, such as the size of dividends, their growth rates, the company's net profit (losses), the amount of debt, the company's development prospects, competitive advantages, industry prospects, etc. Fundamentalists believe that stock prices move according to the 4 determinants that strong foundation theory suggests.

You can learn this theory by taking a “random walk on WALL STREET” with Burton, and in my turn I will very briefly list 4 determinants that explain the pricing of securities:

Determinant # 1: Expected Growth Percentage.
The higher the percentage of growth in a company's dividend, the more a rational investor is willing to pay for its shares. An addition to this rule: the longer a company's dividend growth period lasts, the more a rational investor is willing to pay for its shares.

Determinant # 2: Expected Dividend Amount.
The more a company's profits are paid in cash dividend payments, the more a rational investor is willing to pay for its shares, all other things being equal.

Determinant number 3: the degree of risk.
The lower the risk of a stock, the more a rational investor is willing to pay for it.

Determinant # 4: the level of the interest rate.
The lower the key interest rate, the more a reasonable investor is willing to pay for the stock.

Fundamental analysts spend resources to get the most relevant data, communicate with the management and employees of the company. That is, using a rational approach, fundamentalists identify stocks undervalued by the market. They are considered undervalued when the intrinsic value of the stock is higher than the market value. But, despite the seriousness of the approach, fundamental analysis as well as technical analysis often fails. You will learn more about this later.

In a nutshell, I told you about two completely opposite approaches to the analysis of securities. Now let's start looking in detail at the 3 forms of market efficiency theory.

Weak form

A weak form of efficiency theory says that the market price of a stock already takes into account all past data about its quotes. Therefore, using the historical data of quotations of a security, it is impossible to predict its future prospects. The weak form of market efficiency theory makes technical analysis completely useless. When trying to prove otherwise, “technicians” run into difficulties.

First, none of the best technical analysis experts can clearly explain why charts work. There are only guesses, again based on psychology, they say, market participants remember the key price levels for this or that security and do not want to overpay, or, on the contrary, sell it at a "cheap price". And also the assumption that trends in the securities market tend to continue until an event occurs that will lead to a change in the trend. What this event is, though experts do not specify :).

The important thing is that the arguments against technical analysis look more plausible. Well, let's say numerous studies confirm that any price anomaly tends to eliminate itself. That is, if a large number of people start using a strategy, its effectiveness will steadily decline. If we talk about traders who use exclusively technical analysis in their activities, then as the popularity of a particular strategy grows, its effectiveness will decrease. In the digital age, when the speed of information dissemination is lightning fast, the popularity of one or another successful strategy grows exponentially.

Why is the effectiveness of the strategy steadily declining? This is due to the fact that more and more traders act as if forward, buying and selling securities before the signal for this appears. This is necessary in order to achieve at least some satisfactory results. And premature actions, in turn, reduce the number of successful transactions, which negatively affects the final income. The market is a very effective mechanism in this respect.

Testing the weak form of market efficiency

To test the weak form of market efficiency for fairness, 2 groups of tests were carried out.

Test group # 1.
If the market is efficient, then the autocorrelation of asset returns should be near zero. That is, the future profitability of an asset should not be somehow related to its past profitability. The studies were carried out for different categories of assets and the fairness of the weak form of market efficiency was confirmed by the results of these studies (the autocorrelation of asset returns was practically zero).

Test group # 2.

The purpose of the second group of tests is the same as that of the first, it just has a slightly different form. This is a test for the random nature of price movements. The test looked like this: if the price of an asset rose during the day, then a + sign was added to the results table, if the loss then -. The test results looked something like this:

etc…

This nature of price changes was no different from a series of heads and tails when tossing a coin, this suggests that the past dynamics of the asset price can in no way help in determining its future values.

Testing trading strategies based on technical analysis methods turned out to be a difficult task. The thing is that those. analysis is a very subjective thing, some traders see a certain pattern on the chart, others do not. Or, some traders act strictly according to a certain strategy, while others deviate from it. And there are countless strategies at the moment, so it is simply unrealistic to check them all. That is why fairly well-known strategies based on objective data analysis were tested. Research has shown that these strategies do not provide a statistically significant advantage over the buy and hold strategy, and this does not include commission costs. If you take into account the impact of taxes and commission costs, which become significant in the case of extremely active trading in securities (or other asset), then even those strategies that are not yet so popular and allow you to receive income above the market lose their advantage.

On this occasion, the legendary speculator George Soros spoke very appropriately. True, he specialized in the foreign exchange market, but for considering the efficiency of the market, it does not matter what it is about: the foreign exchange or stock market. According to Soros, those years, when he was engaged in speculative activity in the foreign exchange market, were golden, trends with a high degree of probability were repeated, and the main task of a technical analyst was to find a trend before the rest. At the moment, the situation has changed a lot, and it is more and more difficult to obtain supernatural profitability.

In terms of the weak form of market efficiency, I have everything. It remains to add that the simplest and at the same time logical way to check the performance of technical analysis is to look at what capital the best "technicians" have managed to accumulate. You will hardly see successful personalities, millionaires among these people. You will be presented with a typical picture of a loser. These failed geniuses only whine that they could achieve unprecedented returns if they only believed the signals of their own trading strategy at the crucial moment.

Soros is perhaps the only exception. But as stated earlier, he speculated in currency at a very good time when capital markets were not as efficient. In addition, at the moment, the growth of his fortune has slowed down and lags behind the profitability that a diversified investment portfolio could give.

Moderate form of market efficiency

This form of market efficiency states: all publicly available information is already taken into account in the market price of an asset, and cannot be used to predict its future values.

That is, an investor cannot use any publicly available information to predict the future value of an asset. The moderate form of effectiveness tests fundamental analysis for strength. In order to find out whether fundamental analysis can be used to get profitability above the market, one should check the most common strategies, which are based on fundamental analysis.

Testing the moderate form of market efficiency

Trading on the news

I have already mentioned this strategy in passing. It consists in purchasing shares of those companies that showed profits significantly different from analysts' forecasts. It is theoretically possible to make a profit using this strategy. According to statistics, if the discrepancy between the company's real profit and analysts' forecasts is 20% or more, the strategy justifies the commission costs.

Remember, I said that even before the news comes out, the market reacts to new information. So, according to the strategy under consideration, 31% of excess return falls on a certain period before the announcement, 18% on the day the news is published, and 51% for the period after the announcement. Typically, excess profitability gradually fades away in 90 days. And now I was considering a case when the profit was higher than analysts' forecasts. As for the bad outcome, when the company shows less than expected profit, the strategy works worse. Researchers have never been able to figure out for sure whether additional returns can be obtained by short-selling shares of “losers”.

There is another, more advanced version of this strategy. It consists in making deals when political and economic events occur in the country and the world. This is an even more dubious undertaking, because how can you generally predict how this or that news will affect the price of a stock or bonds of which company. Sometimes news, which, it would seem, cannot affect anything, lead to a strong resonance in the market.

But even if it was possible to predict the consequences of this or that event, the adaptation of prices to new information occurs very quickly, in about an hour. If the news came out at the moment when the stock market is closed, then upon its opening the security will be fairly valued by the market participants. This strategy simply cannot provide a significant gain that would allow obtaining a profitability higher than the market, taking into account transaction costs.

Calendar effects

There is such a price anomaly as the January effect. It is explained by the fact that most investors sell unprofitable shares at the end of the year (December) to optimize taxation. Also, many people sell part of their assets before the new year in order to spend money on gifts for family and friends. In January, people tend to buy assets.

Thus, due to the high concentration of orders for the sale of shares in December, the prices for shares fall, and in January, due to the high concentration of orders for the purchase of shares, the prices rise abnormally. True, I would like to point out that it is incorrect to say that buyers or sellers rule the market. There is always a buyer and a seller in a deal. It is important.

There is another no less logical explanation for the January anomaly, and it lies in the fact that investment fund managers are trying to embellish their reporting and sell toxic assets at the end of the year.

The amount of excess return depends on the size of the company. The smaller the company, the more pronounced this effect. It would seem that this is the recipe for buying shares of small companies at the end of December and selling them at the end of January, when their prices are high. But not everything is so simple. As always, taxes and commission expenses eat up the lion's share of excess income. And the second problem is, again, a decrease in the effectiveness of the strategy due to its massive use. Here is a graph showing the effectiveness of the January effect compared to the S & P500:

In addition to the January effect, there is also the Monday evening effect. It lies in the fact that the market opens with a decline from Friday to Monday. Moreover, this anomaly is present throughout the year except January. In January, on Monday, the market opens with an increase in quotations for securities. Statistically, the Monday night effect works about 60% of the time. And this is a problem because not only does a speculator run the risk of making an idle buy or sell, he can also miss significant market movements. For example, on July 29, 2002, the dow jones index rose by as much as 447.49 points or 5.5% per day, which is quite a high figure for such a developed stock market. But that I am all the United States and the United States, let's see what is the maximum daily growth of the MICEX index for the entire period of its calculation. On October 20, 1998, the index rose from 30.96 to 40.76, that is, by 30.95%. Such “crazy” profitability by the standards of a developed market is the norm for our newly reborn market. Moreover, the economic situation in the country was more than deplorable, hence the increased profitability as compensation for the huge risk, which went only to the most daring and financially literate investors.

Split shares

This is the process of crushing securities. The company's management changes 1 share for several shares in order to reduce the value of 1 share. Buying shares right after splitting will not get additional profitability.

Initial public offering (IPO)

The company decides to become open and for this it issues shares. During the initial offering, securities rise in price (approximately 15% growth occurs on the day of the initial offering). Accordingly, the best strategy for a speculator would be to buy shares on the day of the IPO. But even acting quickly, it will not work to get tangible profits that will cover the costs. You can only profit from this strategy if you actually own long-term stocks. But by and large it is impossible, because the IPO market is Russian roulette, it is very difficult to determine the growth potential of new companies. That is, even using a buy and hold strategy, it is very problematic to get excess returns when buying shares on the day of the IPO.

Dogsdow

This strategy was developed by Michael O'Hoggins. In simple terms, it involved a selection of 10 shares with the highest dividend payments from a list of dow jones. The reason why the strategy worked and made it possible to receive profitability 2-3% per year higher than the average one could get in the market was that the high dividends companies that went out of fashion were trying to attract investors. When Michael published his book, professional investors immediately adopted the investment strategy he described. They set about creating foundations that tried to "rein in the dow dogs." But the high popularity of this investment strategy has led to the fact that, since the publication of the book, its effectiveness has been steadily declining. And since the late 90s, the use of the “dog dow” strategy in practice has only led to lagging behind the market.

Small companies effect

As the name suggests, small-cap companies can generate income that is higher than the market average. The explanation is very simple. It is much easier for small companies to grow than large ones. But it would be a mistake to believe that the effect of small companies is indicative of market inefficiency. It is the presence of an additional risk premium in the form of increased investment returns that indicates its effectiveness.

Why for the extra risk? Well, everything is obvious here: small companies are much more likely to experience financial difficulties than large ones. Accordingly, in order for investors to have a reason to acquire assets with increased risk, some kind of compensation and increased profitability are needed - this is what is needed in this case.

A very good example of such compensation is the historical performance of small stocks. For greater reliability, a long time interval was taken. So in the United States, since 1926, shares of small companies outpaced the shares of large companies in terms of profitability by an average of 1.5% annually.

Dividend party

It is believed that the size of dividends can predict the future performance of a stock. For this, the D / P ratio (the ratio of the dividend yield to the share price) is used. The higher the resulting coefficient, the higher the future profitability of the stock will be. But this is just a guess. In fact, the dividend level is not all that useful in predicting the future performance of a stock. The level of dividends often depends on more global economic changes, more specifically, on the level of the key rate. The higher the key rate, the more profitability is provided by debt assets (bonds, deposits, etc.), and shares, in turn, should provide the investor with compensation for a higher level of risk.

That is why, during a period of high yields on the debt market, the share price falls, while the dividend yield rises. Thus, owners of shares in the long term can expect higher returns than bondholders due to an increase in the market value of a share, as well as an increase in dividend payments. This is how debt and equity assets compete for investors' money. The fact that the level of dividend yield depends on the key bank rate is quite consistent with the efficient market hypothesis (ERM).

I would also like to note that the anomalous effect of stocks with high dividend yields to some extent manifested itself until the end of the 90s of the 20th century. In the 21st century, this price anomaly does not manifest itself in this form, to be more precise, for some companies the effect of high dividend yield works, but for others it does not.

Profitable shares

This is a variation of the previous strategy. Only if the previous strategy used the D / P ratio, then this strategy uses the P / E ratio (the ratio of the share price to the company's annual profit). The low P / E of a stock is believed to indicate that the market is underestimating it. Accordingly, by buying stocks with a low P / E ratio, you can expect a tangible increase in income. But unfortunately, not everything is so simple. For example, the market may be in a situation where the market average P / E ratio is high, but stock returns are still high. This is the situation in the US stock market. Between 1992 and 2001, the P / E was over 20% and the idea was that stocks should have returned 5%. In fact, the return on the S & P500 index, which represents 80% of the American stock market, was expressed in double digits. That is, an investor, blindly trusting the “profitable stocks” strategy, would have missed the powerful growth of the stock market.

Losers Today Are Winners Tomorrow

Yes, there is such an uncomplicated way of investing, which consists in acting from the opposite. It consists in purchasing shares that have fallen in price. This is essentially the most logical of all the above investment methods, but it is also not without its drawbacks. After all, companies whose shares have fallen in price may really experience difficulties and in the long term they will not get out of a difficult financial situation.

But nevertheless, in case of success, the investor will have a double win: an increase in the share price + an increase in dividend yield. And if you also “season” this investment strategy with high-quality fundamental analysis, the gain will most likely cover the costs of its implementation.

There are other strategies aimed at getting extra profit, but I have presented only the most famous ones for your review. The results of testing the moderate form of effectiveness are somewhat contradictory. On the one hand, most investment strategies based on different forms of fundamental analysis do not give a statistically significant advantage over index investing, thereby confirming a moderate form of market efficiency. But at the same time, some strategies (“Losers today - winners tomorrow”, in some cases “dividend party”) allow the investor to get excess returns. But despite this, we can say that the stock market is more moderately efficient. Moreover, the results of studies indicate that the effectiveness of those strategies that give excess profitability is gradually decreasing.

Strong form of market efficiency

This form of efficiency looks like this: public and private information has already been taken into account in the market price of a particular asset, and therefore it is simply impossible to get in excess of profitability even with top secret information. According to the research results, it turned out that at the moment there is no market in the world with a strong degree of efficiency. That is, the miners of private information can sleep peacefully (until the check J arrives). And with the help of private information, you can make not just money, but a lot of money.

In addition, if it were not so, there would be no need to create anti-insider legislation.

But the funny thing is that just the possession of private information does not automatically convert it into money. It is necessary to think over your actions several steps ahead, to show maximum ingenuity and dexterity in order to get tangible profit and at the same time not to be caught “by the hand” by the securities commission. Let me remind you that insider activity is punishable.

That is, the investor takes a lot of risk, striving for maximum profitability. But for many, such circumstances make this "gold mine" even more desirable.

Testing the strong form of market efficiency

In order to test the strong form of market efficiency, insiders were divided into different groups.

Group # 1: corporate insiders.

Group # 2: analysts

Group # 3: portfolio managers

Corporate insiders

This group of investors is not numerous; it is characterized by the fact that it has exclusive access to classified information. In Russia, for example, this group of insiders is obliged to provide reports to self-regulatory organizations (NAUFR, PARTAD, SKRO), which subsequently provide the obtained data to the central bank of Russia. It is very clear from these reports that insiders are consistently profitable and act faster than the rest of the market, thereby disproving a strong form of market efficiency.

Analysts

Analysts are, as it were, half the insiders. The thing is that they, like other investors, study publicly available data, but in addition they also meet with the company's management, its managers, and simply with employees in order to assess the human factor, the company's development prospects, and also identify hidden financial problems. ... That is, they are as close as possible to private information.

But it cannot be said that all the information received during such working trips will necessarily lead to a profitability higher than the market average. A situation may arise when the analyst simply misinterprets the received data and, as a result, will give an erroneous forecast.

In addition, as a rule, the management of the companies arranges for the analyst such a warm welcome with luxurious banquets and entertainment programs, some gifts, life in elite hotels, that one can forget about an impartial assessment on his part. If the analyst's self-control simply goes off scale, then if on the basis of the information received it is possible to achieve a certain advantage over the stock exchange crowd, then usually it is not great.

Portfolio managers

These participants in the stock market in the classical sense are not insiders, but they move in circles where there are insiders from the first two groups. That is, they can potentially receive information from analysts at first hand, so to speak, and react to it faster than other market participants. But only a few funds allow these opportunities to receive super-profitability.

I conducted a small analysis of the situation in the mutual fund market from 2008 to 2017 in terms of the efficiency of the mutual fund of shares and index mutual funds. The market yield of stocks in Russia is most fully represented by the broad market index, because it includes the 100 most liquid stocks of both large and small companies.

But index funds do not use this index as a benchmark, instead they take the MICEX index, which consists of the 50 largest companies operating in Russia. We must not forget that the MICEX index, as well as the broad market index, does not take into account dividend yield in the calculation. Therefore, as a benchmark for market returns, I took the MICEX Net Total Return index, which takes into account the growth in the market value of shares and the dividends paid on them.

Here are the results of this little benchmarking analysis.

Glory to the winners:

Remarkably 25% of funds outperformed the stock index in 9 years. Quite a predictable result, since data on foreign funds show approximately the same situation in the collective investment market. Choosing a successful fund is much more difficult than it seems. If we take 2008 as the beginning of the report, how do you know which of the 36 funds will be successful in the next 9 years, because only a quarter of them surpassed the market? The probability of error is very high and the error is costly.

But what about index funds?

Here's how index funds performed over the same time frame:

It is sad to realize that a good idea can turn bad if done carelessly. Such low efficiency of index funds is due to the fact that the overwhelming majority of funds have total costs for investors just off scale (fluctuating from 2% to 7% of NAV annually !!!).

The funds that came closest to the aggregate market return had, as expected, the lowest costs throughout their lives. Although not without excesses. The first fund "Alfa Capital-MICEX Index" has become a mystery to me, I have not figured out why for 9 years the shares of this fund showed a negative trend of -0.71%.

Perhaps this is due to the fact that the fund did not follow the index exactly, or it was holding a surplus of funds at the time of the market growth. With the second fund, everything is clear, it seems to be an index fund, but at the same time, the rules of trust management say that the manager applies some elements of active management, changing the structure of the investment portfolio in favor of more “productive shares”. Such disgusting performance of other funds, as I said, is associated with high costs.

That is, a prudent index investor who wants to achieve returns as close to market indicators as possible should consider the following guidelines:

1. It is necessary to choose the index funds with the lowest costs in order to get income as close to market indicators as possible.
2. It is necessary to watch that the funds occupy the smallest possible share in the structure of assets.
3. Read the rules of trust management of mutual funds and see that the fund's strategy is solely to follow the underlying index. Any elements of active management are unacceptable, especially since you could already be convinced that such an activity leads to sad consequences.

In terms of the accuracy of following the base index, it looks much more attractive, and the commissions for this investment instrument are lower than for any mutual fund.

So is it active investing or investment indexation?

We have briefly dealt with the 3 forms of market efficiency, but the most important thing for an investor is to decide for himself how to relate to the theory of market efficiency. You can try to personally disprove the theory of market efficiency and outplay the market, or you can join the club of "lazy people" and just follow it,

Before making a decision, you need to really face the facts. Are you ready for the constant analysis of a large amount of information (financial, corporate reporting, reports on the state of the economy, etc.) in order to try to outperform other market participants? You need to understand for yourself that the stock market is not a charitable organization, there are no free pies. The stock market is more like a battlefield with only one rule: woe to the vanquished. This is what I mean, trying to get ahead of the market, you enter into a battle with the same investors, professionals in their field, many of whom are better than you by an order of magnitude. And even with the best efforts, efforts can turn to ashes, because no one is immune from mistakes, and as we found out, the market presents a lot of surprises. It is also worth answering the question: what happens if I fail, what will I do? What will be my physical and mental state in this case?

In addition, in the long term, there are not so many ways to get profitability above the market average. You also need to have some qualities to enter the winners' club. This is a remarkable store of knowledge, rich experience in analytical work, nerves of steel, as well as impeccable discipline.

If you do not want to devote your whole life to active investing (this is not passive investing, which places much less demand on the investor) and you have even the slightest doubt about the future investment results, quit this business, do not waste your nerves, time and energy in vain ... Better to do some other activity, and let the market work for you. If you are determined, that is also good, because the more investors try to outperform the market, the more efficient it will be, which means that the passive investor will outperform the majority of active investors.

So the fun is that the market cannot be ineffective. If, for example, technical analysts admit defeat and quit analyzing the historical data of securities, then the weak form of market efficiency will cease to exist. The same applies to fundamental analysis, if market participants stop evaluating the company's intrinsic value, as well as taking advantage of various market anomalies, then the market price of shares will no longer take into account all public information, which means that a moderate form of efficiency will sink into oblivion. That is, it is the activity of market participants that actually saves the theory of efficiency from oblivion. The conclusion suggests itself that the inefficient market itself is the absence of a market.

Well, perhaps I have nothing more to add. If you find any shortcomings, or if you do not understand anything, write to me in the comments, if your question is personal, please go to the contacts section and contact me in any way convenient for you. All the best.

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