Market efficiency means the market price of a security reflects the market's consensus estimate of the value of said security. More formally, market efficiency means the unanticipated portion of the return on a security is unpredictable, and over a sufficient number of observations, does not differ systematically from zero. The unanticipated portion is the actual return less what was expected based on some fundamental analysis.
Fama (1970) defined market efficiency in the forms of weak, semi-strong, or strong. The weak-form of market efficiency means the unanticipated return is not correlated with previous unanticipated returns, thus the market has no memory and knowledge of past returns, and they have no bearing on determining future returns. Semi-strong market efficiency means market returns are not correlated with any publicly available information. And lastly, with the strong-form of market efficiency, the unanticipated return is not correlated with any information be it public or insider since all available information is already being reflected in present returns.
The relationship between share prices and macroeconomic variables is well documented for the United States and other major economies. However, what is the relationship between share prices and economic activity in emerging economies? The purpose of this study is to investigate the relationship between stock market returns and the macroeconomic variables of consumer price index, M1 money supply, foreign exchange rate, gross domestic production, and oil price in Brazil, Russia, India, and China (BRIC) to determine which form of market efficiency is present in the relationship.
This dissertation is divided into five chapters, including literature review, methodology, and results. The five chapters are as follows: (1) Chapter I introduces the topic and the need for the study. The introduction gives the background of the problem, research questions, purpose, significance of the study, and its organizational plan; (2) Chapter II contains the literature review, subject matter research, and theoretical framework; (3) Chapter III explains the origin of the data for the BRIC countries and the Vector Autoregressive Model (VAR) methodology to be used to obtain the relationship between the stock market price and macroeconomic aggregates and Granger testing to determine the presence of cointegration in determining market efficiency. This chapter also introduces the hypotheses for the expected relationship between the dependent and independent variables; (4) Chapter IV presents analysis of the results; (5) Chapter V provides the conclusions of the study and correlates it with the hypotheses made in the methodology chapter, as well as implications of the form of market efficiency exhibited.