Abstract
Hypothesis of Market Efficiency is an important concept for the investors across the globe holding diversified portfolios. With the world economy getting more integrated day by day, more people are investing in global emerging markets. This means that it is pertinent to understand the efficiency of these markets. This paper tests for market efficiency by studying the impact of global financial crisis of 2008 and the recent Chinese crisis of 2015 on stock market efficiency in emerging stock markets of China and India. The data for last 20 years was collected from both Bombay Stock Exchange (BSE200) and the Shanghai Stock Exchange Composite Index and divided into four sub-periods, i.e. before financial crisis period (period-I), during recession (period-II), after recession and before Chinese Crisis (periodIII) and from the start of Chinese crisis till date (period- IV). Daily returns for the SSE and BSE were examined and tested for randomness using a combination of auto correlation tests, runs tests and unit root tests (Augmented Dickey-Fuller) for the entire sample period and the four sub-periods. The evidence from all these tests supports that both the Indian and Chinese stock markets do not exhibit weak form of market efficiency. They do not follow random walk overall and in the first three periods (1996 till the 2015) implying that recession did not impact the markets to a great extent, although the efficiency in percentage terms seems to be increasing after the global financial crisis of 2008.
Highlights
The efficient market hypothesis (EMH), popularly known as the Random Walk Theory, is concerned with the informational efficiency of the capital markets
This study applies a classical framework of testing market efficiency by determining whether or not the time series data from Chinese and Indian stock returns follow the random walk model using statistical tests including normality, autocorrelation, runs test, variance ratio and unit root tests for null hypothesis of a random walk are employed: Jarque-Bera (JB) Test is used to measure the normality of the distribution
The main objective of this study is to examine whether the stock market follows a random walk or is weak form efficient
Summary
The efficient market hypothesis (EMH), popularly known as the Random Walk Theory, is concerned with the informational efficiency of the capital markets. In the literature of capital markets, the term market efficiency is used to explain the relationship between information and share prices. It was first introduced and defined by Eugene Fama in 1970, where he had defined market efficiency as the efficiency in stock markets when the security prices in that market adjust rapidly to the introduction of new information. In any efficient market, current prices of securities should reflect all the information useful for price prediction of securities in the stock market and there is no way to earn excess profits (more than the market) by using this information. Stock prices are said to follow a random walk
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