APC313 FINANCIAL MARKET

Evaluate the effectiveness of the activity 2.1 Basic form of Efficient Market Hypothesis EMH A market where stock prices reflect the basic information of companies is called efficient

Student Name: Nguyen Thuy Linh

Module Code: APC313

Module Name / Title: Financial Markets

Due Date: 12 Jan 2018

Centre / College: Banking Academy of Viet Nam

Hand in Date: 12 Jan 2018 Assignment Title: Individual assignment

Students Signature:

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Table of Contents

Question 1 4

Question 2 15

Question 3 16

Question 4 20

Reference 23

APPENDIX 27

in the global rankings has SSE (2016) SSE has three major operations is issuing, listing and trading

Listing is the admission of a company's securities for trading on the stock exchange (James, 2014)

To listing IPO shares the issuer applies to SSE must meet the conditions below:

- The total share capital of the issuer must be more than 50 million Yuan (RMB)

- China Securities Regulatory Commission (CSRC) approval is required for stocks that have been issued to the public

- Issuers must ensure that their accounting records are free of false records and that there has been no record of major law violations within the past three years

- Trading in securities will be subject to the principles of fairness, publicity and justice

- All securities trading activities are conducted on the principle of voluntariness, honesty, indemnity and good faith according to regulations of the Ministry of Foreign Affairs and the Exchange

(SSE, 2006)

The trading process of SSE is as follows: Stock trading on the SSE is conducted through the Shanghai Stock Exchange It is done through auctions focused on automated computer systems, then all orders are placed by open auctions through the main computer will automatically incorporate orders based on the principle give priority to time and price Orders are sent to the main computer through the seats of SSE members on the stock exchange

(Javvin, 2008)

2 Evaluate the effectiveness of the activity

2.1 Basic form of Efficient Market Hypothesis (EMH)

A market where stock prices reflect the basic information of companies is called efficient stock market (Degutis and Novickytė 2014) According to Allen, Myers and Brealey, an effective market occurs when it is impossible to earn higher returns than the market returns (2011) Degutis and Novickytė also said that market efficiency has three basic forms: Weak forms, semi-strong form and strong forms (2014)

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2.1.1 Weak forms EMH

All information contained in the past behavior of the price belong to asset is determined to be weak form (Howells and Bain, 2005, p.543) In order to determine the weak form, can run the distribution model to examine the randomness of volatility of stock prices and use serial correlation technique's data analysis to test the independence of the next price movement (Ajao and Osayuwu, 2012) After testing, if subsequent price changes of equity-traded stocks are random and independent so this capital market is belong to weak form

2.1.2 Semi-strong form EMH

Semi-strong form is reflected by all current and past public information, not just through stock prices (Mishkin and Eakins, 2011, p.121) The appropriate direct to test of strong-form efficiency is the study of events (Derdas, 2009) This research aim to determine the market response to events and information published In more detail for the purpose of this test is publicly information and events such as stock splits, acquisitions and mergers may affect the price of the stock

2.1.3 Strong form EMH

According to Keane, a strong market is effective when stock prices are fully reflected through not only published information but also all unpublished information and data (1983) It means that, even for those who have access to insider information such as major shareholders or general director can-not exploit the information to find benefits for them In practice, there are strict rules and regulations that prohibit the use of internal information to trade in financial markets (Mishkin and Eakins, 2011)

3 Literature Review

According to Chung's assessment of the Chinese stock market from 1992 to 2005, he said that the Chinese stock market like the emerging stock markets also was not as effective in terms of information (2006) The research of Chung use the random walk hypothesis and examined the effectiveness of two major stock markets in China using the daily data three Shenzhen index chains and three Shanghai index chains from 1992 to 2005 The author uses this method to determine the

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time series predictions in Chinese stocks that violate the random walk hypothesis, it represents past stock changes that cannot be used to predict stock prices in the future The results of the statistical test indicate that China's two main stock markets are Shanghai and Shenzhen are not a weak-form market

According to Niblock and Sloan, two authors examined the efficiency of weak-form market models

in four Chinese stock markets “Shenzhen A”, “Shenzhen B”, “Shanghai A” and “Shanghai B” in the 2002-2005 period and the authors also use the theory of the random walk to show the predictability

of China's stock indices and together with some evidence of predictability in recent (2007) The results of the study show that the stock market in China is not weak-form efficient (Niblock and Sloan, 2007)

In contrary, Xinping also studied the effectiveness of the Chinese stock market through two major stock markets, Shenzhen and Shanghai To determine the effectiveness of the Chinese stock market, Xinping used random walk theory and divide the data sample then applied the GLS, DF, PP KPSS and ADF tests on stock market returns to be able to test the original unit in the data series in each Shanghai and Shenzhen stock markets (2010) The results of this study show that the data series is unstable so the Chinese stock market is belong to weak-form efficient market

4 Testing

4.1 Data

To test the effectiveness of the activity on market, firstly, Shanghai Composite Index is the market selected for research within 90 days from 17th July to 24th November 2017 Secondly, the five companies listed on the Shanghai Composite Index are Aeolus Tyre Co Ltd, Jinneng Science and Technology Co Ltd, SINOPEC Shanghai Petrochemical Co Ltd, Datang International Power Generation Co Ltd and Greenland Holdings Corp Ltd are also used to testing All information about the closing price of Shanghai Composite Index and 5 companies are taken from Investing.com source (For more detail please refers to Appendix 1)

4.2.1 Daily Return

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Formula: Ri = Pt – Pt-1

Pt-1

Ri: Daily Return of Stock

Pt: Daily close price of stock at time

Pt-1: Daily close price of stock at time (t-1)

(For more detail about daily return of SSE and five companies from 17th July to 24th July please refers to Appendix 2)

4.2.2 Weak-form Test

Figure 1: SSE Daily Return

Figure 2: Daily Return of Datang International Figure 3: Daily Return of Aeolus Tyre Co Ltd

Power Generation Co Ltd

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Figure 4: Daily Return of Greenland Holdings Figure 5: Daily Return of Jinneng Science &

Corp Ltd Technology Co Ltd

Figure 6: SINOPEC Shanghai Petrochemical Co Ltd

Looking at the line graph of SSE, it can be seen that the daily return index of this Index from 17th July to 24th November has many fluctuations There are three fluctuations that are most apparent on 17th July, the daily return index fell sharply to -1.43% and then to 11th August, dropped to -1.63% and on 23rd November, the sharpest drop in three months to -2.26%

The daily return index of Datang International Power Generation Co Ltd and Aeolus Tire Co Ltd also has a lot of fluctuations special in 17th July, when share price of two companies dropped sharply

to 3.62% and -7.66% respectively

It is clear that all three shares of Greenland Holdings Corp Ltd, Jinneng Science and Technology Co Ltd and SINOPEC Shanghai Petrochemical Co Ltd decline on 17th July, 11th August and 23rd November In particular on 17th July, two shares of Greenland Holdings Corp Ltd and Jinneng Science and Technology Co Ltd had the strongest drop and were -5.43% and -9.29% respectively

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International Power Generation

Co Ltd

Aeolus Tire

Co Ltd

Greenland Holdings Corp Ltd

Jinneng Science and Technology

Co Ltd

SINOPEC Shanghai Petrochemical

Table 1: Correlation Test of 5 companies

This table shows the correlation of daily indexes of 5 companies The highest correlation was at 39% between SINOPEC Shanghai Petrochemical Co Ltd and Datang International Power Generation Co Ltd and lowest at 0.1727% between companies Aeolus Tire Co Ltd and SINOPEC Shanghai Petrochemical Co Ltd

In general, from charts analyzing the daily index of 5 companies, the five companies most have a strong to decline in 17th July, 11th August and 23rd November The results show that all indicators of the Shanghai Composite Index represent correlated regression models; shares of companies are predictable for each other

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4.2.3 Semi-strong form Test

Figure 7: SSE Daily Return

It can be clearly seen that the 3 days have the strongest drop of SSE 17th July was called "Black Monday" on the Chinese stock market with the Shanghai Composite Index down 1.4% to 3,176.46 (Cheng, 2017) China's stock market fell sharply in Friday's (11th Aug) to -1.63% Chinese stocks plunged on 23rd November with Shanghai Composite Index had fell to -2.26%

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Figure 8: Daily Return of Datang International Power Generation Co Ltd

In early August, Datang International Power Generation Co Ltd announced that the company was facing financial hardship as Beijing failed to raise electricity prices last month to cut coal costs (Ng, 2017) As a result, the company's shares were continuously negative in early August Particularly, the highest decline in early August was on August 11, it dropped to -3.27%

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Figure 9: Daily Return of Aeolus Tire Co Ltd

On 11th July, there is public information reported that Aeolus Tire Co Ltd lost $ 30.4 million in the first nine months of 2017 (Ho, 2017) Therefore, the stock price of the following days has dropped sharply Especially on July 17th, the daily return index fell strongly to -7.66%

Figure 10: Daily Return of Greenland Holdings Corp Ltd

According to Bloomberg, on 25th August, Greenland's report revealed that Greenland based units in Liaoning had short-term liabilities of 247.5 million Yuan and 210 million Yuan in obligations long-term and they stressed the concern about the company's debt (2017) Th is disclosure of the company

in the report is widely publicized on websites and newspapers on 29th August caused the share price

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Figure 11: Daily Return of Jinneng Science and Technology Co Ltd

According to EnergyWorld, on 11th August, a landslide occurred at a mine pit that left many people dead by Lu Xin Co Ltd, owned by Jinneng Science and Technology Co Ltd (2017) And this made the stock price of Jinneng Science and Technology Co Ltd decrease Specifically, it fell to -0.93% at Friday's session

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Figure 11: Daily Return of SINOPEC Shanghai Petrochemical Co Ltd

According to Sahara Reporters, on Wednesday, 23rd August, Sinopec was investigated by the US government for allegedly bribing Nigerian government officials for a $ 100 million bribe to settle business disputes (2017) This makes the price of stock of SINOPEC Shanghai Petrochemical Co fell sharply to -4.75% in 24th August and this is the sharpest decline from 17th July to 23rd November

4.3 Result

Based on the Weak-form Test and Semi-strong Form Test with Literature Review, it shows that emerging market in China are not only showing signs of Weak-form but also showing signs of Semi-strong Form

Question 2

Follow to Mishkin and Eakins, Eurocurrency is foreign currency that is deposited at banks abroad (2012) For example, Eurocurrency can know that the Japanese yen kept by the banks in London are Euro yen, the pound is held in the banks in Germany is Eurosterling The Eurocurrency market emerged after the Second World War when considerable amounts of US dollars were kept in Europe especially in London in the 1950s and 1960 (Arnold, 2012) The main reason for the development of this market is the same as the other finances market innovation, it reduces the cost of international trade by providing traders a viable means of saving on trade balances in a world where trade is denominated and traded in dollars (Balbach and Resler, 1980)

This market has the following main functions Firstly, the Eurocurrency market allows countries and corporations to lend and borrow funds world- wide, picking the financial institution which is the most suitable regardless of geographic position (Arnold, 2012) Secondly, the Eurocurrency market is known as a parallel money market serving as a financing source for short-term financing of foreign trade, so that banks can adjust liquidity at certain times in year and as a major source of funding for some borrowers (Howell and Bain, 2007)

Recently, the bank has regulations and restrictions on capital flows that have stimulated the robust development of Euromarkets Some of the regulations that affect US banking operations by

Eurocurrency market is useful for conducting international transactions because according to Howell and Bain, it helps increase the range of opportunities for both borrowers and lenders to narrow the gap between interest rates and lending rates, and it also provides critical risk insurance for episodes transnational corporations Thus, the movement of international short-term capital has increased significantly and it has become a major force in international capital market integration (2007)

In addition, the growth of Eurocurrency market has produced far reaching effects on the monetary scene and the international financial system Firstly, these floating funds have augmented the official international liquidity and helped the financing of deficits in the balance of payments of countries (Clark, 1993) Secondly, these Eurocurrency funds are found useful for private corporate investments and for working capital purposes (Pilbeam, 2010) Thirdly, this market provided the quick and efficient source of funds

Question 3

1 Differences between Money markets and Capital markets

Money and Capital markets are the two groups that make up the financial market and the most noticeable difference between these markets is the length of time that loans are borrowed (Howells and Bain, 2007)

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Instruments Market Treasury Bills, Certificate of

Deposits, Commercial Paper

Bonds, stocks or shares

Level of risk involved

in operation

exchanges at the building where the securities is located

Participants Market Government, Commercial banks

and Brokerage firms

Companies and Governments

Table 2: Differences between Money and Capital Markets

1.1 Market Instruments

Market participants will be meeting the diverse needs of a wide range of money market instruments available such as Treasury Bills, Certificate of Deposits, Commercial Paper (Mishkin and Eakins, 2011) Major instruments traded in the capital market include bonds and stocks or shares of the company (Howells and Bain, 2007) (For more detail about example please refers to Appendix 3)

1.2 Maturity

Money market is the stock market with short-term debt period of about one year or less (Bodie, Kane and Macus, 2015) Capital markets provide capital for long-term use with an initial maturity of more than one year (Mishkin and Eakins, 2011)

1.3 Level of risk involved in operation

Because trading securities have short-term, highly liquid so the money market is low risky and due to long-term maturity, capital market face the volatility of prices, creating more risk than the money market (Mishkin and Eakins, 2011)