Does the Indian Stock Market Exhibit Random Walk?

Abstract

The efficient market hypothesis (EMH) states that security prices reflect all available information and investors cannot earn excess return by trading on the basis of this information. EMH is an important concept for the stockbrokers, financial institutions, individual and institutional investors and regulators government. An investment strategy of an investor is greatly influenced by market efficiency. Market efficiency also dictates the regulatory measures to be developed for ensuring the orderly development and management of the markets in a country. This study intends to contribute to the existing literature by investigating the weak-form market efficiency. The efficiency of the Indian stock market is tested by using the daily data of Bombay Stock Exchange (BSE)-200 index-based companies over the period of 1 January 1991 to 31 December 2012 by employing runs test, augmented Dickey–Fuller test (ADF) Test, Phillips–Perron test (PP) test, autocorrelation test and generalized autoregressive conditional heteroscedasticity (GARCH) (1, 1) model. The empirical results of these tests do not support the weak-form efficiency for the Indian stock market. Therefore, we conclude that the Indian stock market is not weak-form efficient. This result suggests that there is a systematic way to exploit the trading opportunities in the Indian stock market and the investors can earn abnormal profits by exploiting this opportunity. Since the results indicate that the market is not efficient in the weak form, the study of historical prices is beneficial for the investors. This also means that there is a scope for technical analysis as a trading strategy. The findings also open up scope for the market regulators to initiate measures to ensure market efficiency. There is an overwhelming literature supporting the weak-form market efficiency. We employ multiple tests to investigate the dependence structure of the historical prices to unravel the myth of market efficiency in the weak form.