**4. Using EMH in investing decisions**

For a long time, researchers have tried to understand the behaviour behind stock price movements. Efficient market hypothesis and the random walk theories have surfaced as a result of this search to test these behaviours as Fama mentions in his article [58]. In general, however, there are two common methods for stock price prediction which also helps investor decisions: technical analysis and fundamental analysis. They will be individually explained in the following part.

#### **4.1. Technical analysis**

Technical analysis is a theory about past behaviour and deals with the patterns found in stock prices. The theory behind the analysis goes back to Charles Dow, who is the founder of *The Wall Street Journal* [59]. His theory, named Dow theory, looks at stock prices and tries to observe the long-term trends in it. Technical analysts, who are also referred to as 'chartists', believe that past information can be used to predict future stock prices as the patterns tend to repeat themselves. This, clearly, shows that technical analysis and random walk theory support opposite views. According to the chartists, information is not as valuable as it was thought in the past. Because, now, the classic demand and supply factors come into the picture. Reaction of stock prices can be so slow that during this time, an investor can have a chance to exploit the situation [11]. Technical analysis can therefore be used by investors to beat the market and exploit the resources in the emerging economies.

#### **4.2. Fundamental analysis**

when compared to larger firms, they are more focused on increasing their market shares and expanding. Research points out that smaller firms are more likely to reinvest its earnings back into the company and cause the value of its common stock to increase; hence, means

Small-firm effect and the January effect are anomalies that actually go hand in hand with one another. Research shows that stock prices of smaller firms were observed to be more affected by the January effect than larger firms [54]. Rogalski and Tinic also stated that returns of smaller firms were much higher in January than any the other months in the year [55]. This

It is indicated in research that people who live in countries with emerging economies tend to experience more behavioural biases which makes it more interesting to search for anomalies in the markets of these countries [56]. For example, Chui and Wei examined the size effect in Hong Kong, Korea, Malaysia, Taiwan and Thailand using monthly data from 1977 to 1993. Their results showed that the small-firm effect (size effect) was present in all of the analysed countries except for Taiwan [57]. The effects of these anomalies are important to know, and there is lack of information. Therefore, this particular area in research should

As part of the calendar anomalies, we can mention two more: turn-of-the-month effect and turn-of-the-year effect. According to the turn-of-the-month effect, on the last trading day of the month plus the first three days of the next month, an increase in the stock prices is expected. With the same principle, turn-of-the-year effect is about the increase in the stock

Under the fundamental anomalies identified, low price-to-book anomaly states that the lower the price-to-book ratio, the higher the returns will be. Value anomaly takes place when investors over or under estimate the stock returns in the market. Low price-to-earnings (P/E) ratio, which is a common studied anomaly, states that the lower the P/E ratio, the more returns will be [14].

For a long time, researchers have tried to understand the behaviour behind stock price movements. Efficient market hypothesis and the random walk theories have surfaced as a result of this search to test these behaviours as Fama mentions in his article [58]. In general, however, there are two common methods for stock price prediction which also helps investor decisions: technical analysis and fundamental analysis. They will be individually explained in the following part.

Technical analysis is a theory about past behaviour and deals with the patterns found in stock prices. The theory behind the analysis goes back to Charles Dow, who is the founder of

increase in returns in the future [53].

58 Financial Management from an Emerging Market Perspective

can be referred to as an 'anomaly within an anomaly' [56].

be considered and focused more by researchers.

**3.4. Other anomalies**

**4.1. Technical analysis**

prices in the last week of December.

**4. Using EMH in investing decisions**

Fundamental analysis is a method used to determine the prices of stocks using both macroeconomic and microeconomic factors, such as the earnings and dividend information of the firm, expected future interest rates and the risk evaluations. Decisions are made according to whether a particular stock is undervalued or overvalued [58].

The problem with fundamental analysis is to choose the correct firm to analyse. For example, in countries with emerging economies, majority of the firms have the potential to generate high returns. However if, as an investor, you want to achieve more, identifying good firms is not enough as everyone else will already have that information. That investor has to be better than its rivals, has to have a better estimate and finds firms that have more potential for higher returns. Therefore, if efficient market hypothesis holds and all the available information is incorporated into the prices, then fundamental analysis becomes even trickier [11].
