Test of Random Walk Hypothesis: A Study in Context of Indian Stock Market

Abstract

Presence or absence of random walk has always caught attention of academicians, stockbrokers, individuals, institutional investors, financial institutions, and regulators in the area behavioral finance. If the markets are 'weak form efficient', technical analysis fails to make any comments on future price behavior. With this view, the current paper contributes to the existing literature by investigating the weakform market efficiency in Indian Stock market, one of the fastest emerging markets of the world. Daily data of Bombay Stock Exchange (BSE) 200 index-based companies over the period of 1 January 1991 to 31 December 2016 is tested employing Runs Test, Augmented Dickey–Fuller Test (ADF) Test, Phillips Perron Test (PP) Test, Normality Test and Variance Ratio Test. All five tests  show that Indian stock market is not 'weak form efficient' thus, the prices do not follow a random walk and there exists a pattern in them.If these patterns can be exploited at the right time and right manner, investors can earn abnormal returns from the market. This result also supports the relevance of technical analysis as a trading strategy. At the same time, the market regulators should re-think as to why the markets are not efficient despite numerous measures taken since 1991.