Efficient Market Hypothesis and Event Analysis for Trading Strategies

Critically analyzing the Efficient Market Hypothesis (EMH)

This assignment is in the form of an individual coursework report based on the same company used for your presentation, albeit with a different focus on the efficient market hypothesis, event analysis and trading strategies. The purpose is to develop relevant Excel templates to conduct event studies to test market efficiency. Based on the result of event studies, trading strategies and instruments are to be applied to exploit price efficiency/inefficiency during the process of acquisition to arrive at appropriate conclusions and recommendations for the deal.

• Critically analyse the Efficient market Hypothesis (EMH) and its relevance in a highly volatile setting such as a global pandemic especially as they relate to your firm.

1. Draw on a wide range of relevant, high quality, academic literature to give a critical overview of the EMH.

2. Apply the EMH and its counter arguments to your own unique circumstances. Conduct event analysis to test EMH and derive your trading profit from the event. An event analysis template is provided separately based on Chapter 14 contents of Simon Benninga’s textbook ‘Financial Modelling (4th edition)’.

3. Draw on a wide range of relevant, high quality, academic literature to give a critical overview of event study analysis.

4. Conduct regression with market and stock return series to obtain alpha, beta and standard error.

5. Calculate expected return, abnormal return, and cumulative abnormal return. 

6. Calculate significance test using T and other relevant indicators, e.g. standard error, r square.

7. Interpret data to critically reflect on the insights from EMH.

8. In addition, you may use two factors models to enhance the regression used.

• You are required to demonstrate trading strategies and instruments that would be appropriate to exploit price efficiency/inefficiency during the process of acquisition. Your analysis should forecast possible trading profit going forward until the appropriate cut-off date. (30%)

1) Draw on the insights from previous section, describe the type of trading strategies and risk management tools intended for the event and your design principle for using these tools based on the result of event analysis.

2) Demonstrate and calculate total return, using relevant trading instruments for the type of strategy used (e.g. long / short strategy).

3) Illustrate how to avoid adverse price movement because of (a) unexpected downside movement for the long position; (b) unexpected upside movement for the short position; and the characteristics of the type of instrument used to hedge risks.

4) In retrospect, how to use (3) in combination with (2) to maximise profit.