a) Axis bank's stock has been tested for weak form of efficiency using two methods.
The stock price of the stock is taken from 16th August 2007 (the day company's name on NSE was changed from UTI to the present name) to 5th February 2010. The effect of stock prices of past on the present values of stock were found. For this correlation was found between the returns of the stock for a period and the corresponding returns of the next day. The correlation factor was found as -0.0728. This value is very close to 0 and very small relative to the estimation errors and transaction costs. This shows that the stock is consistent with the weak form of efficiency. Thus we can say that there does not exist any patterns in the movement of the stock.
The same has also been probed through moving average price of the stock. The first 100 days data is taken as historical and from the 101st data onwards the prices have been predicted for the day using the moving averages of the data.
The graph shows that the moving average movement cannot help in giving the actual share price. The shape of the two plots may look similar but one cannot predict the share price as we can see there are significant variations. Hence, we can deduce that the stock price is consistent with weak form of efficiency.
The weekday effect says that the returns on Monday (opening day) is lower than that of Friday (closing day) over a period of time. This is inconsistent with the weak form of efficiency of the market. Axis Bank's stock was tested for this. The returns of Monday were compared with that of Friday for a period of over one year. The hypothesis was formed as below:
H0= Means of return on Monday and Friday are equal (µ1=µ2)
H1= Means of return on Monday and Friday are not equal (µ1≠µ2)
To test the hypothesis t test for paired two sample mean. The data are paired as the returns of same week's Monday and Friday are taken. The p values for both one tailed and two tailed tests are more than 0.05 i.e. the α value. Hence, we cannot reject the hypothesis at 5% level and the two means are equal.
We can say that the mean of market returns of Monday and Friday are equal and hence consistent with the weak form efficiency.
b) To test the semi strong form of efficiency of the market the abnormal returns were calculated for last one year period. A few good and bad news for the shareholders of the company were analysed.
Axis Bank decided to raise money through fresh equity fund raising by issuing over 7 Cr. shares as GDRs and preferential allotment on 5th August 2009. This diluted the value of the share and the share prices should have gone down as the information was made available to the public.
The X axis shows the days relative to the announcement. -4 implies 4 days before the news 0 is the day of announcement etc. The Cumulative Abnormal Returns (CARs) have been calculated from the Abnormal Returns (ARs). The above graph shows how the CAR dips a lot one day before the announcement and dips the most on the day of announcement and then moves up. This is consistent with the studies consistent with semi h3 form of market efficiency. It also implies that the market absorbs the bad news on the day of announcement. Hence, we can conclude that the stock is consistent with the semi h3 form of efficiency.
On 14th October 2009, Axis Bank's board of directors announced setting up of Non Banking Financial Company (NBFC). This is good news for the shareholders as it was long awaited and can help the bank expand in this domain. The figure below shows the CAR of the company stocks from 3 days before the announcement to 3 days after it. The spike at day zero shows and the dip afterwards shows that the company stocks absorbed the good news in the stock prices. However, the returns before the announcement do not seem very consistent but that can be due error or some other news etc.
c) The average stock price of the last one year was calculated for Axis Bank and hence the average market cap of the company was found by taking a product with the number of outstanding shares. The total trade volume was also found for the whole year. The ratio of Volume/Average market Cap came at 1.71 i.e. 171%. This signifies very high level of market efficiency for the stocks of the
Company. It also signifies the high depth for the company's stock. The calculations for the same can be found in the embedded excel sheet.
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