Efficiency of Indian Stock Market

Abstract

Market efficiency has an influence on the investment strategy of an investor because if market is efficient, trying to pickup winners will be a waste of time. In an efficient market there will be no undervalued securities offering higher than deserved expected returns, given their risk. On the other hand if markets are not efficient, excess returns can be made by correctly picking the winners. In this paper, an analysis of three popular stock indices is carried out to test the efficiency level in Indian Stock market and the random walk nature of the stock market by using the run test and the autocorrelation function ACF (k) for the period from January 1996 to June 2002. The study carried out in this paper has presented the evidence of the inefficient form of the Indian Stock Market. From autocorrelation analyses and runs test we are able to conclude that the series of stock indices in the India Stock Market are biased random time series. The auto correlation analysis indicates that the behavior of share prices does not confirm the applicability of the random walk model in the India stock market. Thus there are undervalued securities in the market and the investors can always excess returns by correctly picking them.