Hypothesis of information advantage on IPO stocks

H 0: gain a profit when having an advantage of information
H 1: Suffer a loss

As we learned on Topic 4 Information efficiency on this class, the market
price of the stock should present all the information of the market. But i
n real live, we can see that the stock price have increased to some extent
accompanied with the enlarged quantities before the price fly up. That is
to say, there must be some people know the information before the market a
nnouncement. Therefore, they can gain a profit by buying earlier and selli
ng later when the news is good, especially on IPO stock markets. Know we a
ssume the information they got is from an advantage legally and the market
is in normal condition.
These advantage including language advantage, knowledge of products, marke
ting development, potential growth rate and personal experience etc. If th
ey buy the cheap asset and immediately resell at a higher price when most
investor realized it, they are likely to gain a profit.
Know in order to prove this hypothesis, we focus on a new IPO stock, which
will be listed on NYSE on 1st of Nov. 2007 code “GA”. It is an Internet ga
me related company, based in Shanghai, China.
As I have all the advantages listed above, especially language advantage,
so we can assume gain a profit when operating as the following:

Operating strategy:

Buy: stock code “GA” on 1st Nov. 2007 at closing price on NYSE market
Sell: at closing price 4 trading days later
Expecting profit is between 30% and 100%, more accurately say, near 70% if
operate well

The first reason why we choose close price is to avoid the great fluctuati
on based on the facts that the price fluctuation between 10:00 AM and 11:0
0 during one day is very large usually; mostly tend to reach the highest (
when in increasing trends) or lowest price (when in decreasing trends) at
10:30 A.M. Another reason is to avoid a rush buy at the opening, we assume
some other people have also gained information advantage as I am, they per
ceived “GA” value more than others, so they would rather buy at opening pr
ice.

The second reason we choose 4 days is giving investors sufficient time to
analyze and be agreed with increasing price.
If we can gain an expecting profit, Ho is proved and H1 is rejected.