Abstract
This study investigates the evidence of market efficiency dynamics and chaotic behavior of the Dhaka Stock Exchange benchmark index (DSEX) over the 2000-2020 period. We employed the newly developed model of mutual informational and global correlation coefficient in addition to the traditional linear and nonlinear techniques. Results suggest there is evidence of serial dependence in the DSEX returns. We attempted the Lyapunov exponent model to evaluate the possibility of chaos and nonlinear dynamics in the market. The results conspicuously represent the existence of chaotic behavior- a nonlinearity-based profitability pattern revealed in the DSEX return series in its short run behavior. By applying two technical trading indicators, we justify the predicting trend of the Bangladesh stock market and conclude that investors active in the Dhaka Stock Exchange can earn abnormal returns. Findings have practical implications for general investors and professional fund managers to exploit the profitable opportunities and reshuffle the investment decisions. Results also convey the message to the regulatory body to initiate the strategies for intervening in the operating mechanisms to reduce the market inefficiency.
Highlights
Stock market efficiency is treated as a puzzling issue for academic research in corporate finance to validate the random walk model in equity returns behavior
Breusch–Godfrey test statistics results clearly reject the null hypothesis of no autocorrelation and confirm that the random walk hypothesis does not hold for the Dhaka stock exchange benchmark index
We found that the Dhaka stock market is weak-form inefficient
Summary
Stock market efficiency is treated as a puzzling issue for academic research in corporate finance to validate the random walk model in equity returns behavior. It has become imperative for academicians to develop theories and models that explain how stock market prices behave. This theory became popular in early 1970s with the understanding that equity price movements can be modeled [1]. The equity market efficiency is widely tested empirically, still understanding the market behavior has been a crucial area for all kinds of investors to design their investment strategies commensurate with risk-return tradeoff. This framework will lead to the efficient allocation of resources in the market and contribute the overall economic growth
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