Analysing the effect of private and public information on sectoral return volatility : a case study of the Australian stock market

Abstract

This research is motivated by the continued push in challenging the validity of the efficient market hypothesis (EMH). The current thesis contributes to the discussion by addressing the gap in the literature regarding the informational efficiency of ASX 200 sectors. The research was carried out by examining the determinants of return volatility of various sectors in the Australian market by testing the strong form EMH. This was achieved by examining the impact of two new private information proxies (i.e. analyst price targets and Morningstar stock star ratings) and scheduled and unscheduled public information (ASX announcements) on sectoral return volatility. Data for each proxy spanning from 2013 to 2017 were used for stocks listed on the ASX 200 index. Results from the study brings insight into how the volatility of each sector responds to private and public information disclosures. Stock return volatility was empirically estimated using three asymmetric generalised autoregressive conditional heteroskedasticity (GARCH) models: E-GARCH, GJR-GARCH and APGARCH. These models were chosen to ensure robust results and that the best model was chosen to represent the data for each stock. The stock return volatility was employed as the dependant variable to ascertain how analyst price targets, Morningstar stock star ratings and ASX announcements impact sectoral return volatility using panel regression analysis. The findings suggest that analyst price targets play an important role in sectoral return volatility, indicating that investors place heavy reliance on this information when undertaking investment decisions. Morningstar stock star ratings indicate a minor impact on sectoral return volatility due to the lower degree of informational content. Furthermore, the results highlight the fact that the degree of reliance on private information varies significantly between each sector, indicating varying levels of informational efficiency. The impact of public information, proxied by ASX announcements, on sectoral return volatility is found to be of minor effect. Hence the results are mixed, indicating that the strong form EMH holds true in some sectors but not in others. This research provides valuable information for investors who are looking to generate excess returns as well as hedge against future losses, by utilising private information proxies.

Date of Award	2018
Original language	English