The Market Efficiency of Dubai Stock Exchange - Thesis Proposal Example

MARKET EFFICIENCY OF DUBAI STOCK EXCHANGE Market efficiency of Dubai Stock Exchange Affiliation Table of Contents Introduction 3Aim of Research 3 Research Questions 3 Literature Review 4 Theory 6 Data and Methodology 8 Types of Research 9 Explanatory research 10 Descriptive research 10 Exploratory research 10 Sources of Research 10 Primary Source 11 Secondary Source 11 Ethical considerations and Limitations 11 References 12 Introduction The analysis of market efficiency has been in trend recently which has attracted researchers to spend their time analysing markets and their associated efficiencies. Considering the efficiency of the market there is an assumption that at any given time the prices of the stocks reflects fully all the information about them and hence its efficiency can be seen and calculated simultaneously. As per this hypothesis of analysing markets, the efficiency of the market can be analysed by the inter conversion of market information into the asset prices of the market (Marashdeh & Shrestha, 2008). Aim of Research The purpose of the study is to analyse the Market efficiency of Dubai Financial Market (DFM). The thesis will be based around Efficient Market Hypothesis (EMH) of Fama 1970. The term market efficiency is itself derived from the concept of Fama in 1970 which was then formalized and operationalized. The efficient market hypothesis (EMH) describes an efficient market as an entity where fresh statistics or facts are instantly mirrored in the correct format and value in its current security price (Lim, 2009). However the efficiency of financial markets has always been a debatable question which has also been examined empirically by Fama in the form of information sets accessible to the market and then classified Efficient Market Hypothesis into weak-format, semi-strong format and strong-format. Research Questions For analyzing the Market efficiency of Dubai Stock Exchange (DFM) on the basis of Efficient Market Hypothesis (EMH) of Fama 1970, following research questions are identified: 1. Is Dubai Financial Market (DFM) weak form efficient? 2. Is Dubai Financial Market (DFM) semi-strong form efficient? 3. Is Dubai Financial Market (DFM) strong Form efficient? 4. What is the consequence of January on Stock prices? 5. What is the consequence of Weekends & Holidays (off-days) on stock prices? 6. What is the effect of news & announcements on Stock prices? Literature Review It has to be kept in mind that the market efficiency does not really mean that the price of the market should be equal to the market value. It means that that the over-valued stocks and under-valued stocks should be deviated with randomness without incorporation of any kind of biasedness in it. Another implication of the efficient market analysis phenomenon is that the prices of the stock should be of some random walk and all the additional price changes in the near and far future should be only for practical purposes involved and incorporated in it (Abdmoulah, 2010). As the theory of time related with market efficiency came into existence UAE started to flourish. In past 30 years, UAE has exceptionally transformed its market and the growth rates have been tremendously making UAE the most sought out market after Gulf countries. With this transformation into the economic world, UAE started structuring financial markets like Dubai Financial Market (DFM) and Abu Dhabi Securities Market (ADSM) in the year 2000. Since their establishment the ADSM has grown by an estimated 343% while DFM (Dubai Financial Market) has increased by an astonishing figure of about 1238% (DFM, 2012). With the establishing of a market the efficiency of the market gains immense importance as the whole performance of the market lies on the efficiency of the respective mar ket. Market efficiency effectively cuts down all the market distortions and the non-symmetric information’s speculations around. Financial markets are considered main force giving agents which gives effective thrust to the overall economy of the country and is regarded as the main backbone of the economic situations. Apart from all the importance’s the important factor of effective market is that it provides the respective country with the opportunity to raise their capital for further expansion of their market and increment of their infrastructure (Squall, 2005). Dubai Financial Market (DFM) was established in year 2000 in the month of May when the government of the UAE realised about development of public market with an independent status. In its initial days of being, the Dubai Financial Market (DFM) was considered as a secondary market for all the stocks that were issued by stock companies and also for the bonds that were officially released by UAE government. In the Last two decades, the market analysis has been transformed and a particular trend has been adopted following a specific suite. Almost all of the studies carried out are focused on the purpose for finding the answer to the question of randomness in the stock market i.e. whether the trends are random or they have a particular in line plan (Azzam, 2002). A study by Al-Barrak (2010) evaluates the result in the form randomness hence it has been supplemented with a hypothesis named as RWH (Random Walk Hypothesis). RWH (Random Walk Hypothesis) states that the trend followed by the market is random and there is no way the future trends and future possibilities can be predicted keeping in light the past results and deductions (Al-Barrak, 2010). Another study by Asiri & Alzeera (2013) carves out the result that there is a possibility to predict the upcoming of the future by taking a glimpse of the past trends. The efficiency of the any Stock exchange market can be judged or evaluated as efficient when the prices of all the securities are reflected in the relevant information. The main hypothesis that predicts the efficiency is EMH (Efficient market hypothesis) stands on the basic step Weak form efficiency that states the absence of the predictability of series prices linked with time series (Asiri & Alzeera, 2013). Theory As per FAMA efficiency is the most important factor in the performance of any market. Efficiency is the main measure in order to test and to have confidence of investment in any certain market. Resource allocation and portfolio point view are directly linked with the respective markets efficiency. Dubai financial market has been shown by its trends as relatively meagre and the outcomes shown are mixed. The conclusion that can be drawn from all this weak form efficiency literally supports (Lo, 2013). Detailed study of the markets of UAE gives a detailed result of the UAE market and shows that mainly the UAE market is weak form ineffective. The test that predicts these results are known as serial correlation test. The procedure that has been employed to check whether its weak form efficient or not the procedure used is comparatively un-robust showing that all the market returns are normally and symmetrically distributed. All the assumptions that are deducted and conclude after taking in view the whole previous trends is that all the firms forms two independent markets under the banner of the main single UAE stock market (Ali & Mustafa, 2001). DFM (Dubai Financial Market) mainly comprises of over 28 universities. The total of the firms that are linked with DFM are about 7 banking sector companies, 9 companies are related to the field of insurance and damage repairing companies while there are about 4 companies that are involved in the investment field and the remaining number of companies that are 7 are linked with Services (DFM.AE, 2012). As per the study of the past it has been seen that between the year of 2001 and 2002 all the listings of DFM has been increased by huge percentage of 50% and from 2002 to 2005 the total incrementing ratio resulted to be 11%, 60%, 75%. So this incrimination made an overall result of about substantial increase of 1238% in capitalization. Random walk hypothesis is mainly tested by the tests that are known as variance ratio test. The variance ratio test inducted for the evaluation of efficiency is mainly motivated by a stated fact that variance of the random walk has a linear incrementing relation with time (Al-Barrak, 2010). The vario-ratio testing method has now been employed as one of the method of testing and judging of efficiency of the respective market. Stock markets and the companies related to the market play an important role in the overall economy of a country. It forms the main back bone of a country economic policy and helps earning assets for the expansion and incrementing of the overall structure (Acevedo, 2012). Efficiency plays a basic role in this as greater the market efficiency of the respective market; greater will be its impact mainly positive impact on the state of country economy or the economy of an organization. Efficiency and the trends of the stock market are interlinked with the surrounding happening and the situation that is externally going on. The impact of external happening imparts a great effect on the market situation (Asiri & Alzeera, 2013). The effect that has been imparted can positive as well as negative making the overall condition of the market change with it. With the holidays and all the other off days coming, the value of the stocks is disturbed. The stock rate can go to decrement with these holidays coming announced and un-announced. The political and all the overall conditions can also affect the overall stock market. With stability in the surrounding and social peace the economic stability can be seen and the market trends recorded are comparatively better. Situations disturbing the surrounding environment and all the bad happening can affect the overall stock market. These effects regardless of any kind are transmitted to the very basic companies around. The overall effect reaches to the basics shaking the overall structure of the entire market (Marashdeh & Shrestha, 2008). Data and Methodology Research methodology is the most major piece of research. This stage is considered basic because of the way that the whole authenticity and validity of a research is reliant upon the research approach. The criticality of the stage is likewise being comprehended from the way that a methodology irrelevant or inappropriate to the objective of the research would not prompt any positive results (Kothari, 2011). The determination of a specific system for a research is dependent upon an address that the research aims to answer and the general nature of the examination. Accordingly not every strategy discovers importance to the each examination question. The choice of perfect methodology is dependent upon the judgment of the specialist focused around the assessment of its strengths and weaknesses. For this study Qualitative research is used. Qualitative research is a technique which discovers issues, answer queries and comprehend judgment of people. In this study the stock market behavior will be examined in depth and then pertinent information is gathered according to its requirements. The significant characteristic of qualitative method is that it does not depend only on numbers based on statistics. A qualitative research follows a subjective approach to analyze the given information for the research purpose. Using this method, the researcher adds subjectivity to data analysis process and provides analysis by describing various aspects of the subject (Blessing & Chakrabarti, 2009). According to Traver (2001) qualitative research technique follows an idealistic approach and adds a humanistic essence to the research process. The qualitative technique requires the researcher to involve in measurement and calculation of the data and identify relationships between the variables which are involved in the research. This method of research ignores the factors and processes which define the relationship between different variables (Denzin & Lincoln 2005). According to Marczyk, DeMatteo and Festinger (2005), the factors that play role in selecting appropriate methodology for a research include the basic aims and objectives to be attained, the particular nature of the research subject and the theoretical and practical frameworks to be used. The process of selecting the methodology for this research along with justification of the selection is provided: Types of Research There are three basic types of academic research which include explanatory, descriptive and exploratory methods (Dawson 2002). Each type of these research methods is associated with certain strengths and weakness and finds relevance to the particular research objectives of the researcher. In order to make the most appropriate selection for this research, it is necessary to understand and evaluate the suitability of each type of these methods. Explanatory research Explanatory research is used where the objective of the researcher is to evaluate the causes and effects of the subject under research. In this method, the researcher attempt to identify combination of such factors that affect the phenomenon underneath research. Descriptive research Descriptive research method as the name suggests aim to explore a subject by describing various aspects of it. This method collects information regarding the subject from different sources and combines them together to provide a comprehensive description of it. Therefore, in order to apply this methodology, it is essential that the phenomenon under study is previously well researched (Eriksson & Wiedersheim-Paul 1997; Myers, 1997). Exploratory research Exploratory research is the third type of research method which finds suitability where the intention of the researcher is to uncover the facts and facts and relationships between various factors. This methodology is most applicable where prior knowledge about the research subject is limited and other two methods mentioned above cannot be applied. Supplementary, exploratory research method is relevant where the subject under study is hard to investigate and describe. Sources of Research Usually, the research depends on a wide variety of sources of information. However, we can divide these sources into two categories such as primary sources and secondary sources: Primary Source This study implies that the primary research will be based on a qualitative approach which in this case will be based on the interview tool, whereas the interviews will be taken from industry specialist of DFM. Secondary Source Secondary data is existing information collected for another purpose, by a person or organization other than the users of the data. Sources of secondary data include census data, national surveys, health care registers, government administrative records such as birth and death registers. Secondary data is cost-effective, as it cheaper and quicker to collect than primary data as it reprocesses and recycles existent data already collected by a third party. According to (Kothari, 2011) “if the secondary data set is required to be bought, the cost is found to be comparatively less as opposed to the travelling or transportation cost involved in collection and processing stage for data set from scratch”. Ethical considerations and Limitations Just like in any other research, it is important that ethical considerations are kept under consideration especially while collecting data. Even though they might not seem so, they are extremely vital with regard to any kind of research because if ethical considerations are not taken into account they may also lead to distortion of results. For instance if a respondent is not sure about the privacy of the interview which is being recorded, he/she may not give honest answers and opinions which will make the research invalid and in accurate. Therefore it is important to make sure that the respondents know that their responses will be used as anonymous and that the information that they give will remain confidential (Pock, 2007). References Abdmoulah, W. (2010). Testing the Evolving Efficiency of 11 Arab Stock Markets. International Review of Financial Analysis, 25-34. Acevedo, M. F. (2012). Data Analysis and Statistics for Geography, Environmental Science, and Engineering. CRC Press. Al-Barrak, A. M. (2010). Day-of-the-Week Effect in Some of Gulf Cooperation Council (GCC) Stock Markets. Scientific Journal of King Faisal University. ALI, S. S., & MUSTAFA, K. (2001). Testing Semi-strong Form Efficiency of Stock Market . Retrieved from http://www.pide.org.pk/pdf/PDR/2001/Volume4/651-674.pdf Asiri, B., & Alzeera, H. (2013). Is the Saudi Stock Market Efficient? A case of weak-form efficiency. Research Journal of Finance and Accounting. Azzam, H. T. (2002). The Arab World: Facing the Challenge of the New Millenium. I.B.Tauris. Blessing, L. T., & Chakrabarti, A. (2009). DRM, a Design Research Methodology. Springer Science & Business Media. Denzin, N.K., & Lincoln, Y.S., 2005. Introduction: The Discipline And Practice Of Qualitative Research. In N.K. Denzin& Y.S. Lincoln (Eds.), The Sage Handbook Of Qualitative Research (2nd Ed.). Thousand Oaks, Ca: Sage. DFM. (2012). A Glance at Dubai Financial Market. Retrieved from The Investor Handbook: http://www.dfm.ae/Documents/gen/01-A-Glance-at-DFM_ENGLISH.pdf DFM.AE. (2012). CORPORATE GOVERNANCE REPORT 2012. Retrieved from Dubai Financial Market - Annual Report 2012: https://www.dfm.ae/documents/IR/Corporate%20Governance%20Report%202012.pdf Kothari, C. R. (2011). Research Methodology: Methods and Techniques. New Age International. Lim, K. P. (2009). An Empirical Analysis of the Weak-form Efficiency of Stock Markets. Department of Econometrics and Business Statistics. Lo, A. W. (2013). EFFICIENT MARKETS HYPOTHESIS. Retrieved from http://web.mit.edu/alo/www/Papers/EMH_Final.pdf Marashdeh, H., & Shrestha, M. B. (2008). Efficiency in Emerging Markets - Evidence from the Emirates Securities Market. European Journal of Economics, Finance and Administrative Sciences. Myers, chael D. "Qualitative Research in Information Systems." MIS Quarterly, Volume 21, Issue 2 (1997): 241-242. Pock, A. v., 2007. Strategic Management in Islamic Finance. USA: Springer. Squall, J. (2005). Are the UAE Financial Markets Efficient? Economic Policy Research Unit. Read More