Efficiency test in US Stock Market
Discuss the concept of stock market efficiency with reference to the Efficient Market Hypothesis
(EMH) and its application to the US stock market. Using daily closing values of the S&P 500
from January 2005 to December 2014, evaluate the presence of market anomalies and test the
weak form of EMH. Explain the methodology used for testing (including parametric and non-
parametric tests, randomness tests, and serial correlation tests) and present the findings. What do
these findings suggest about the efficiency of the US stock market and what measures can be
taken to improve its efficiency?
Word Count Requirement: 2,000 - 2,500 words.

Introduction
We see a continuous momentarily variation in stock prices or Indices (e.g. S&P 500, Dow Jones
etc) of a stock market in both the directions. It is very difficult to anticipate the direction for very
short period of time or its value at an instance of time. Even it is difficult to estimate for long
time horizon but we do with blunt degree of accuracy. With the help of extensive research on
historical data we can somehow find the trend and maturity value of Index up to some extent.
This tendency of stock market makes it highly volatile and risky for investment purpose. Stock
Market Efficiency and market Anomaly have always been a major matter of concern for investor
as well as for researcher. A better understanding of both is always helpful to stakeholder for
taking correct decision and parking of capital in more efficient manner. The term “Efficient
Market Hypothesis (EMH)” has been widely used in stock market and extensive researches have
been carried out in both developed and emerging market. In contrary of this, stock market
anomaly has also been observed in different forms.
Efficient market hypothesis (EMH)
The market theory has been proposed by Eugene Fama in 1960. His theory states that it is
impossible to beat the stock market because at any point of time security prices reflect all
available information in the market. Stocks are traded at their fair value. It is impossible to trade
in under or overvalued securities. Investor can earn abnormal return only by way of speculation
through investment in riskier securities. There are three type of EMH. First is the “weak” form of
EMH that assumes current stock price fully reflects all security related information. Historical
price data has no bearing on the future movement of stock price and hence therefore it is
impossible to earn excess return with the help of technical analysis. The second is “semi-strong

Efficiency Test in US Stock Market

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