Test of Random Walk Hypothesis: A Study in Context of Indian Stock Market
Main Article Content
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.
References
i. Abraham, A., Fazal, A. J., & Sulaiman, A. (2002). Testing the random walk behavior and efficiency of the Gulf stock markets. The Financial Review, 37, 469–480.
ii. Abrosimova, N., Dissanaike, G., & Linowski, D. (2005). Testing the weak-form efficiency of the Russian stock market. SSRN Working Paper.
iii. Alagidede, P., & Panagiotidis, T. (2009). Modelling stock returns in Africa’s emerging equity markets. International Review of Financial Analysis, 18, 1–11.
iv. Alimov, A. A., Chakraborty, D., et al. (2004). The random walk hypothesis on the Bombay Stock Exchange. Finance India, 18(3), 1251–1258.
v. Ali, S., Naseem, M. A., & Sultana, N. (2013). Testing random walk and weak form efficiency hypotheses: evidence from the SAARC region. Finance Management, 56, 13840–13848.
vi. Al-Loughani, N. E. (1995). Random walk in thinly traded stock market: the case of Kuwait. Arab Journal of Administrative Science, 3(1), 189–209.
vii. Lo, A. W., Mamaysky, H., & Wang, J. (2000). Foundations of technical analysis. Journal of Finance, LV(4), 1705–1766.
viii. Antoniou, A., Ergul, N., & Holmes, P. (1997). Market efficiency, thin trading and non-linear behavior. European Financial Management, 3(2), 175–190.
ix. Asal, M. (1998). Trends towards efficiency for the Egyptian stock market. University of Goteborg, Sweden.
x. Asiri, B. (2008). Testing weak-form efficiency in the Bahrain stock market. International Journal of Emerging Markets, 3(1), 38–53.
xi. Awad, I., & Daraghma, Z. (2009). Testing weak-form efficiency of Palestinian securities market. International Research Journal of Finance and Economics, 32, 7–17.
xii. Ayadi, O. F., & Pyun, C. S. (1994). Application of variance ratio test to Korean securities market. Journal of Banking and Finance, 18, 643–658.
xiii. Barua, S. K. (1981). Short run price behavior of securities — Evidence on efficiency of Indian capital market. Vikalpa, 6(2).
xiv. Batool Asiri (2008). Testing weak-form efficiency in Bahrain stock market. International Journal of Emerging Markets, 3(1), 38–53.
xv. Butler, K. C., & Malaikah, S. J. (1992). Efficiency and inefficiency in thinly traded stock markets. Journal of Banking and Finance, 16, 197–210.
xvi. Chan, K. C., Gup, B. E., & Pan, M. S. (1992). Empirical analysis of stock prices in major Asian markets and the US. The Financial Review, 27(2), 289–307.
xvii. Park, C. H., & Irwin, S. H. (2004). Profitability of technical analysis. AgMAS Research Report.
xviii. Park, C. H., & Irwin, S. H. (2007). What do we know about technical analysis? Journal of Economic Surveys, 21(4), 786–826.
xix. Chaudhuri, K., & Wu, Y. (2003). Random walk versus breaking trend in stock prices. Journal of Banking & Finance, 27(4), 575.
xx. Civelek, M. A. (1991). Stock market efficiency revisited. Middle East Business and Economic Review, 3, 27–31.
xxi. Cooray, A., & Wickremasinghe, G. (2008). Efficiency of emerging stock markets in South Asia. Journal of Developing Areas, 41(1), 171–183.
xxii. Coronel-Brizio, H. F., et al. (2007). Evidence of increment of efficiency of Mexican stock market. Physica A, 380, 391–398.
xxiii. Dickey, D. A., & Fuller, W. (1979). Distribution of estimators for autoregressive time series. Journal of the American Statistical Association, 74(366), 427–431.
xxiv. El-Erian, M. A., & Kumar, M. S. (1995). Emerging equity markets in Middle Eastern countries. IMF Staff Paper, 42, 313–343.
xxv. Dawson, E. R., & Steeley, J. M. (2003). Visual technical patterns in UK stock market. Journal of Business Finance & Accounting, 30(1–2), 263–293.
xxvi. Emerson, R., Hall, S. G., & Zalewska-Mitura, A. (1997). Evolving market efficiency. Economics of Planning, 30, 75–90.
xxvii. Engle, R. F. (1982). Autoregressive conditional heteroscedasticity. Econometrica, 50, 987–1008.
xxviii. Fama, E. F. (1991). Efficient capital markets II. Journal of Finance, 46(5), 1575–1617.
xxix. Fama, E. (1965). Behavior of stock market prices. Journal of Business, 38, 34–105.
xxx. Fama, E. F. (1970). Efficient capital markets: review of theory and empirical work. Journal of Finance, 25, 383–417.
xxxi. Fama, E. F., & French, K. R. (1988). Permanent and temporary components of stock prices. Journal of Political Economy, 96, 246–273.
xxxii. Guidi, F., Gupta, R., & Maheshwari, S. (2011). Weak-form efficiency and calendar anomalies. Journal of Emerging Markets Finance, 10(3).
xxxiii. Gough, O., & Malik, A. (2005). Random walk in emerging markets. In Risk Management in Emerging Markets.
xxxiv. Groenewold, N., & Ariff, M. (1998). Effects of deregulation on share market efficiency. International Economic Journal, 12, 23–47.
xxxv. Groenewold, N., & Kang, K. C. (1993). Semi-strong efficiency of Australian share market. Economic Record, 69, 405–410.
xxxvi. Gupta, O. P. (1985). Behaviour of Share Prices in India. National Publishing House, New Delhi.
xxxvii. Gupta, R., & Basu, P. (2007). Weak form efficiency in Indian stock markets. International Business & Economics Research Journal, 6(3), 57–63.
xxxviii. White, H. (2000). Reality check for data snooping. Econometrica, 68(5), 1097–1126.
xxxix. Hassan, K. M., Al-Sultan, W. S., & Al-Saleem, J. A. (2003). Stock market efficiency in GCC countries. Scientific Journal of Administrative Development, 1, 1–21.
xl. Shirvani, H., & Delcoure, N. V. (2016). Random walk in OECD stock prices. Journal of Economic Studies, 43(2), 598–608.
xli. Kendall, M. G. (1953). The analysis of economic time-series — Part I: Prices. Journal of the Royal Statistical Society, 96, 11–25.
xlii. Kemp, M., & Reid, D. (1971). The random walk hypothesis and stock prices. Journal of Financial and Quantitative Analysis, 6(4), 929–944.
xliii. Kim, D., & Shamsuddin, A. (2008). Are Asian stock markets efficient? Evidence from variance ratio tests. Journal of Empirical Finance, 15(3), 518–532.
xliv. Lim, K. P., & Brooks, R. (2011). The evolution of stock market efficiency over time. Journal of Economic Surveys, 25(1), 69–108.
xlv. Lo, A. W., & MacKinlay, A. C. (1988). Stock market prices do not follow random walks: evidence from variance ratio tests. Review of Financial Studies, 1(1), 41–66.
xlvi. Lucas, A. (1997). Stock price behavior in emerging markets. Emerging Markets Review, 3, 113–125.
xlvii. Madhusoodanan, T. P. (1998). Random walk behavior in Indian stock market. Finance India, 12(4), 1233–1240.
xlviii. Mishra, A. K. (2011). Empirical study on weak-form efficiency of Indian stock market. International Journal of Economics and Finance, 3(4), 142–151.
xlix. Narayan, P. K., & Smyth, R. (2007). Are shocks to stock prices permanent? Applied Economics, 39(20), 2517–2527.
l. Poshakwale, S. (1996). Evidence on weak-form efficiency and day-of-the-week effect in Indian stock market. Finance India, 10(3), 605–616.
li. Poterba, J., & Summers, L. (1988). Mean reversion in stock prices. Journal of Financial Economics, 22(1), 27–59.
lii. Roberts, H. (1959). Stock market patterns and financial analysis. Journal of Finance, 14(1), 1–10.
liii. Samuelson, P. (1965). Proof that properly anticipated prices fluctuate randomly. Industrial Management Review, 6, 41–49.
liv. Sharma, J. L., & Kennedy, R. E. (1977). Survey of stock price behavior in Bombay market. Journal of Financial and Quantitative Analysis, 12(3), 391–398.
lv. Singh, R., & Tripathi, V. (2016). Testing random walk hypothesis in Indian stock markets. International Journal of Economics and Financial Issues, 6(2), 523–528.
lvi. Smith, G. (2008). Liquidity and efficiency in African stock markets. South African Journal of Economics, 76(2), 161–175.
lvii. Summers, L. (1986). Does the stock market rationally reflect fundamental values? Journal of Finance, 41(3), 591–601.
lviii. Urrutia, J. L. (1995). Tests of random walk and market efficiency in Latin American markets. Journal of Financial Research, 18(3), 299–309.
lix. Worthington, A., & Higgs, H. (2004). Random walk behavior in European markets. Global Journal of Finance and Economics, 1(1), 59–78.
lx. Wright, J. H. (2000). Alternative variance-ratio tests using ranks and signs. Journal of Business & Economic Statistics, 18(1), 1–9.
lxi. Zivot, E., & Wang, J. (2006). Modeling Financial Time Series with S-PLUS. Springer.
License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.