Weak Form of Market Efficiency: Evidence from Nepalese Stock Market

Abstract

This paper examines the weak form market efficiency of Nepalese stock market by using 1970 daily observations from 2003 to 2009 of the general NEPSE index and seven different sector-wise indices. The study employs five different tests of random walk: autocorrelation test, runs test, unit root tests (ADF, PP, and KPSS), variance ratio test and autoregressive conditional heteroskedasticity test. The results of the tests are in broad agreement, conclusively rejecting the presence of random walk in daily returns of the eight stock market indices. The serial correlation tests and the runs tests both revealed that the successive price changes are not random and are serially dependent. Similarly, the unit root tests conclude that unit roots, as necessary conditions for a random walk, are absent from all of the return series. Finally, the results of variance ratio and GARCH (1,1) procedures convincingly reject the presence of random walks in the index return series implying that the Nepalese stock market is not efficient in the weak form.