Finance Essay Example | Topics and Well Written Essays - 1000 words - 7

Finance - Essay Example Most of these tests however have been carried out in the developed countries and have largely ignored the developing countries. This paper seeks to discuss the levels of market efficiency in the Japanese equity markets in order to determine whether they are successful or not. This will be done by evaluating several empirical studies carried out in the same. Market efficiency literature review Kono, Yatrakis & Segal (2011) carried out a study on the Japanese stock market efficiency. The authors sought to compare the performance of a stock portfolio that consisted of exchange-traded funds (ETFs) against the performance of the overall stock market which was represented by the Topix Index. This was carried out using data that was available from the 30 June 2008 to 30 June 2009. In their study, they constructed the exchange traded funds according to the Modern portfolio theory that was developed in 1952 by Harry Markowitz. The study was based on the null hypothesis that â€Å"A portfolio composed of Japanese ETFs and constructed according to the MPT provides a higher return per unit of risk than the Topix Index†. In order to arrive at the optimal portfolio of ETFs, the authors used the statistical data related to the ETFs, the mean variance optimisation model of the MPT and the risk free rates as well as the expected market return. In order to help in determining the optimal portfolio, they also used a software program that was designed for the same purpose. The optimal portfolio that they used comprised of 7 ETFs which complied with the selection criteria for the study in terms of maturity and criteria. The statistical results obtained from the data analysis were used to calculate the return per unit of risk of each of the ETFs (Kono et al., 2007). The results of the study showed that the ETF portfolio that was used in the study performed better in terms of the ratio of performance to risk as compared to the overall equity market. This means that the portfol io of ETFs had a lower negative return per risk unit than the entire Japanese equity market. The study therefore concluded that it is possible for an optimal portfolio of ETFs to perform better than the whole equity market index if the performance of the portfolio and the market is measured using the return per unit of risk which is also referred to as the Sharpe ratio by players in the stock market. The authors suggested that further research in the Japanese stock market should be carried out to test the relationship between the cash flows of the company and their performance in the stock market (Kono et al., 2011). Andersen, Bollerslev & Cai (2000) carried out a study on the â€Å"Intraday and interday volatility in the Japanese†. The study investigated the volatility of performance in the Japanese stock market. The study used a 4 year sample of 5-min Nikkei 225 returns for the period from 1994 to 1997. Testing the intraday volatility resulted in the observation that they b ehaved in a doubly U shaped pattern which was explained to be as a result of the opening and closing of the morning and afternoon trading sessions of the Tokyo Stock Exchange. The authors explain that the observed feature of the doubly U shaped pattern is consistent with other market theories that have advanced the importance of private and asymmetric information when determining the prices of stocks. It was also found that announcements about the macro