Financial Markets: Efficiency Market Theory, Risks, and Exchange Rates

This report provides a comprehensive analysis of financial markets. It begins with an introduction to the financial market and its role in trading securities. The report then delves into the Efficiency Market Hypothesis (EMH), exploring its features and levels (weak, semi-strong, and strong forms) along with supporting literature and empirical evidence. It also includes an overview of the London Stock Exchange (LSE) and presents data, including FTSE All-Share components and graphs to illustrate market trends. Furthermore, the report analyzes capital and money markets, risk assessment, and currency exchange rates (UK to US). It concludes by examining the influence of the financial market system on economic growth, discussing adverse selection, moral hazard, and financial regulations.

Financial Market

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
(a): Efficiency market theory......................................................................................................1
(b): Literature of EMH................................................................................................................3
(c): London stock exchange........................................................................................................4
QUESTION 2...................................................................................................................................7
(a): Capital market and money market-characters......................................................................7
(b): Function: Through using charts............................................................................................9
QUESTION 3 ................................................................................................................................13
(a): Risks-explanation...............................................................................................................13
(b): ............................................................................................................................................13
(c): UK and US currency exchange rate graphs........................................................................14
(d): Various rates.......................................................................................................................14
(e): Graphs for both foreign exchange rate UK to US..............................................................15
QUESTION 4.................................................................................................................................17
(a): Financial market system influences economic growth.......................................................17
(b): Adverse selection and moral hazard...................................................................................17
(c): Financial regulations...........................................................................................................17
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18

INTRODUCTION
Nowadays, it has been seen that most of the companies are busy in trading of their
securities in their respective stock market. Financial market is a place where entities would be
able to trade underlying assets, commodities at very minimum transaction costs or at the prices
that indicate supply and demand in near future time. It is more wider term that describe
marketplace where trading of securities is been done in more effective manner. A place where
shares or stocks of corporate organization are listed over stock exchange are traded in the market
(Subrahmanyam and Titman, 2013).
This project report is providing crucial information about financial market in which
efficiency market theory and explained effectively. A deep analysis of EMH with empirical
evidences are mentioned under this report. Information about capital and money market through
using charts are analyses effectively. Further, risk assessment evaluated with uncertainty-
appreciation or certain explained related with 2013 to 2017 exchange rate are included in this
report. Financial market system that can influence in economic growth of an economy.
QUESTION 1
(a): Efficiency market theory
In accordance with financial market analysis manager need to collect specific information
about certain position of share price movement in the market. In an efficiency market
competition among various intelligent participants will leads in a condition where, at any given
point of time real(actual) price of single securities reflect the effective of data. It is based on both
activities that are occurred and on every events the market is estimated to take into consideration
in coming time. An efficient market at stage the actual costs of a security will be a positive
prediction of their intrinsic value (Chiang and Yang, 2015). It has been found that in recent past
time researchers would not be able to determine any predictable pattern in the share market
prices. Quick solution was that these outcomes seem to support the irrationality of current
market. In other words, in an efficient market which is happens to be appropriate point in time as
actual cost of share will positive reflect future value for the company. There are certain specific
feature of this theory that state that the share prices movement are random and cannot follow
continuous pattern.
Feature of efficient market:
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 Every instruments must be accurately priced as all information is properly determine and
absorbed by investors.
 The chances of excess profits are not possible for an economy.
 The forces associated with demand and supply change at large and in an independent
manner.
Illustration 1: Efficient Market Hypothesis
(Source: Yicheng Lin, 2016)
According to “ Eugene Fama”: The efficient market hypothesis divided market into three
level. Each of them are different in accordance to the information that would reflect in the stock
value. Such as
Weak Form Efficiency: It is known as financial stock prices which is incorporate every
historical data into present cost. Future stock prices would not be estimated on the base on
analysing past stock prices of an economic. Like for example, no any value will be gained
through evaluating past stock prices variations, hence this cannot be helpful to predict future
modification in the price (Li and Mei, 2013).
Semi-Strong form Efficient: It is kind of stock price data which is incorporate all
publicly presented information which is based on historical and current data. There is no any
kind of delay in responses to data disclosure. Like for example: There are certain specific data in
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an SEC filing would be incorporate into a inventory prices as soon as submission is made on
public level.
Strong form Efficiency: It uses to incorporate all data associated with private as well as
public departments. Market prices would reflect all known data potentially available to evaluate
true value to various investors. In case market is strong enough, then it is impossible to beat the
market performance through perusing any kind of data.
(b): Literature of EMH
Efficient market hypothesis is an a perfect landmark paper on the economic market which
is being adjusted on broad analysis of the theory. It is a kind of market in which costs remain
always fully reflects every available data which is efficient to make investment in various shares
of the company. It is more reliable to go through the articles, papers and other works of data
collection researchers those are spending most of them time trading in stock market. Stock prices
fluctuation as it would assist the current study so here an attempts is being made to survey the
literature associate with the stock markets. The more crucial significant problems which is being
present in discussion board are the market efficiency hypothesis (EMH). Maximum of them are
either support the efficient market hypothesis or poses challenges to the contents. Those are
interested in the study of stock prices fluctuation which cannot be skipped without looking in
reliable manner (Ahmed, 2013). In the financial market research, the EMH has been put on trail
basis and subjected to critical re-examination. It has been determine equilibrium model has failed
to depict trading operations in current work scenario.
FAMA has determine as the market which is categories into three parts, strong, semi-
strong and weak market. It is said that strong market is having all the available data. Henceforth,
investors with insider study cannot make profit other than native investors.
In semi-strong market, Fama indicate that the market provide all publicly present data
then and there rule out any one to make gains with internal skills and ability. The researcher state
that in 1984 they would said to determine that the intra-days trades will make impacts in stock
prices which would takes times to reach the market in more quick manner (Breedon, Chadha and
Waters, 2012).
Weak form of market hypothesis used to maintain that the stock prices used to provide all
prices and returns in more quick manner. The counter make argue that even before that market
price discloses the prices that can be estimated with accounting and macroeconomic variables.
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Evidences of inefficiencies:
The past prices were estimated on the basis of early prices, dividend yield and so on. It
was also true that stock prices which is assimilated in more effective manner. Researchers agree
that extent the theory of EMH is valid. But lawfully, they increase some sort of question that can
be associated with price fluctuation in the stock market. It has been seen that maximum of price
movements are arises because of public announcement.
The current position: The researchers state that present debate between the financial
analysts is over predictable of stock price movements. As per the accumulative evidences which
would recommend that stock prices that can be estimated with a fair degree of transparency and
reliability (McMorrow and Roeger, 2012).
(c): London stock exchange
LSE is known as one of the appropriate securities exchange market which is responsible
for regulating specific stock transactions in the market. It is situated in the city of London,
England. It seems to be worlds oldest stock exchange with the history back more than 300 years.
It enable various companies from all nations to arise capital from outside investors. The primary
motive is to deliver attractive, efficient and well regulative markets for every company. Investors
and other intermediaries such as stockbrokers. It has been analyse from last couple for years that
exchanges would provide a trading base in which members of exchange would be able to buy
and sell shares in the market in more effective manner (Paul and Baschnagel, 2013).
This has been seen that total market capitalisation rate in terms of GBP is about 3396
billion in couple of year backs in 2012. This seems to be more considered that the LSE is one of
the most appropriate stock exchanges from almost 70 nations. It has been one of the more
successful and dynamic industries as compare to another stock markets. The one of the most
dynamic sectors which is use to compare other stock markets. It is more wide development in a
strong as well as regulated in stock exchanges places. There are definite evidences among the
efficient market hypothesis. It has been examine that empirical evidences that support the weak
and semi-strong during the time. There are certain investment professional that will still meet
specific criteria with an appropriate deal to their customers.
(a): FTSE all shares
Top 30 Components
Symbol Company Name Last Price Change % Change Volume
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ANTO.L Antofagasta plc 994 0.4 0.04% 1046359
FPEO.L F&C Private Equity Trust 371.76 -0.24 -0.06% 4076
BAG.L A.G. BARR p.l.c. 693.5 -0.5 -0.07% 6776
HFEL.L
Henderson Far East Income
Limited 368.3999 0.3999 0.11% 40881
RB.L Reckitt Benckiser Group plc 5711 -8 -0.14% 258361
CCH.L Coca-Cola HBC AG 2464 -4 -0.16% 136564
ADN.L ADN.L -
BMY.L Bloomsbury Publishing plc 179 -0.5 -0.28% 41897
STHR.L SThree plc 328 -1 -0.30% 16107
DRTY.L DRTY.L -
SAB.L SAB.L -
ELTA.L Electra Private Equity Plc 824 -2.5 -0.30% 17751
EPG.L
EP Global Opportunities
Trust 312 -1 -0.32% 1683
LSL.L LSL Property Services Plc 266 1 0.38% 540
RAT.L Rathbone Brothers Plc 2400 10 0.42% 6508
SPX.L Spirax-Sarco Engineering plc 5905 -25 -0.42% 28130
CMBN.L Cambian Group plc 167.2 -0.8 -0.48% 4554
NCYF.L
CQS New City High Yield
Fund Limited 60.7 -0.3 -0.49% 222824
HLCL.L Helical plc 384.5 2 0.52% 5672
NII.L
Aberdeen New India
Investment Trust Plc 525 -3 -0.57% 0
HSD.L Hansard Global Plc 78.7 -0.5 -0.63% 14940
TOWN.L Town Centre Securities PLC 293 2 0.69% 4415
AUTO.L Auto Trader Group plc 373.3 -2.7 -0.72% 621895
AHT.L Ashtead Group plc 2174 16 0.74% 477221
SCAM.L
Scottish American
Investment Company Plc 370.48 2.98 0.81% 21277
MRCH.L The Merchants Trust Plc 514.33331 4.33331 0.85% 77694
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MCB.L McBride plc 133 -1.2 -0.89% 14426
MNZS.L John Menzies plc 657 -7 -1.05% 6823
FORT.L Forterra plc 325.09 -4.41 -1.34% 15268
SOPH.L Sophos Group plc 552.34 12.34 2.29% 287581
(b): Pt-Pt-1 Graphs to conform the weak form of market efficiency
From the above graphs, it has been seen that the efficient market hypothesis is varies as
per the total risk and return they are able to gain in near future (Titman, Keown and Martin,
2017).
(c): Pt-Graphs
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According to above this position time graphs which indicate various trends stock trending
markets. There is various essential fluctuation seen in the share prices of different companies. It
is mentioned as per the changing, positive velocity in a line of changing and positive slope that
are plotted as a position time graphs.
(d): 3 up and 3 low events of marks and Spencer
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According to the above bullish and bearish events data of marks and Spencer are
indicated through blue and pink line. The semi-weak time is represent in April 2016 were both
the lines are they start reducing down.
QUESTION 2
(a): Capital market and money market-characters
Financial market can be viewed as appropriate channel through which proper flow of
loanable capital will be directed from a supplier that has no any excess of assets. There are
various types of financial markets with having specific characterisation depends on the properties
of fiscal claims being traded and requirements of various participants in market. Different types
of markets that are relies on types of instruments traded and its maturity (Tumminello and et. al.,
2012).
Capital market: According to this particular market that aids in raising capital on long
term basis. It includes both primary and secondary market that can be divided into two main sub-
parts. Such as bond market and stock market. A primary market where securities like shares and
bonds will be created and traded for the first time without using any additional intermediary. The
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secondary market is a place where investors would be able to purchase issues securities such as
bonds, futures and options from other parties.
Characteristic of capital market:
 Deals in long term investments: It would provide appropriate funds for long and
medium terms. It cannot deal with passage saving for minimum of one year.
 Determinants of capital formation: This particular activities of capital market will assist
in determining the rate of capital formation for an economy.
Instruments traded in capital market:
 Debt instruments: It is known debt instruments which is being used by M&S or
government to incur maximum funds for capital intensive projects. The contracts are
made for specific duration and interest which is paid at particular period of time.
 Equities: These are being issued by companies only and be obtained either in primary or
secondary market. The risk factors in this market are quiet high as well as generate more
return to an organisation.
Participants of capital market: There are certain types of participants those are
associated with capital market are individual, companies and local governments.
Money market: It enable economic units to manager about the liquidity positions
through lending and borrowings medium term loans those are taken under 1 year time period. It
facilitates the interaction among individual and financial organization with temporary gains out
of total capital (Weinstein, 2011). There are certain characters of money market:
 Liquidity: They are fixed incomes securities with minimum term maturities of less than
one year. It has been seen that instruments of money markets are extremely liquid.
 Safety: They need to provide a relatively high degree of safety because of issues are
having the maximum credit ratings.
 Discounting pricing: It is more common as they are issued at a discount to their face or
real value.
Instruments of money market:
 Treasury bills: It is a kind of short-term obligations which is controlled by the treasury
departments of UK with the maturity period of less than one year.
 Federal agency notes: It is known as special government organisation which is set up for
a specific period of time. It is associated with meeting short-term financing requirements.
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Participants of money market: There are certain major participants in money markets
such as commercial banks, governments, corporations and local government sponsored
institutions.
(b): Function: Through using charts
(1): Regulate interest rate
Graphs 1: Inflation rate
It is expressed in percentage form, in case CPI is 3% then it means that price of goods
and services a company used to buy is always higher from 3 percentage. On the other hand, it
would be required to spend total 3 % maximum to buy the same things in an accounting period of
time (Volosovych, 2012).
Graphs 2: Bank rate and policy rate
It is an individual most important interest rate in the UK. It is being set bank of England
as per the instruction of monetary policy committee. High interest rate means people need to pay
more for their services their debts. Policy rate are one of the effective process which is being set
by Bank of England to regular their economy in more effective manner.
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