Indian stock market
Examining market efficiency in India: an empirical analysis of the Random Walk Hypothesis
Alan Harper South University
Zhenhu Jin Valparasio University
ABSTRACT
This study tries to determine whether the Indian stock market is efficient by examining if the stock returns follow a random walk. Following previous studies, we use autocorrelation, the Box-Ljung test statistics and the run test and find that the Indian stock market was not efficient in the weak form during the testing period. The results suggest that the stock prices in India do not reflect all the information in the past stock prices and abnormal returns can be achieved by investors exploiting the market inefficiency.
Keywords: Autocorrelation tests, runs test, random walk hypothesis, stock index, India
INTRODUCTION
If a market is efficient, stock price movements should follow a random walk and the price movements in the past should be not related to future price movements. But if the market is not efficient and price movements are not random, some investors can exploit the inefficiency by gaining abnormal returns. They may be able to correctly predict the future price movements by examining the historical price movements. There have been some studies testing the Efficient Market Hypothesis (EMH) in regards to the India stock market but the results have been inconclusive.
This study analyzes the daily index returns from July 1997 to December 2011 by using some commonly used methodologies to determine whether the Indian market is efficient in the weak form.
The Bombay Stock Exchange was established in 1875 is one of the largest exchanges in Asia and in the world. As of December 2011, the market capitalization on the Indian stock exchanges was $1.015 trillion, 5,112 companies were listed in the exchange with over 20 million shareholders.
The paper is organized as follows. Section II provides a brief review of the literature.
Section III provides the data, while section IV
Alan Harper South University
Zhenhu Jin Valparasio University
ABSTRACT
This study tries to determine whether the Indian stock market is efficient by examining if the stock returns follow a random walk. Following previous studies, we use autocorrelation, the Box-Ljung test statistics and the run test and find that the Indian stock market was not efficient in the weak form during the testing period. The results suggest that the stock prices in India do not reflect all the information in the past stock prices and abnormal returns can be achieved by investors exploiting the market inefficiency.
Keywords: Autocorrelation tests, runs test, random walk hypothesis, stock index, India
INTRODUCTION
If a market is efficient, stock price movements should follow a random walk and the price movements in the past should be not related to future price movements. But if the market is not efficient and price movements are not random, some investors can exploit the inefficiency by gaining abnormal returns. They may be able to correctly predict the future price movements by examining the historical price movements. There have been some studies testing the Efficient Market Hypothesis (EMH) in regards to the India stock market but the results have been inconclusive.
This study analyzes the daily index returns from July 1997 to December 2011 by using some commonly used methodologies to determine whether the Indian market is efficient in the weak form.
The Bombay Stock Exchange was established in 1875 is one of the largest exchanges in Asia and in the world. As of December 2011, the market capitalization on the Indian stock exchanges was $1.015 trillion, 5,112 companies were listed in the exchange with over 20 million shareholders.
The paper is organized as follows. Section II provides a brief review of the literature.
Section III provides the data, while section IV
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