Download Empirical evidence of Efficient market hypothesis on the Indian

Empirical evidence of Efficient market hypothesis on the Indian Stock
markets in the context of the Global Financial crisis
By: Rashmi Narayanswamy
Senior Lecturer, BVDU, Amplify
Abstract:
The study of the stock market efficiency in the Indian context has been the objective of
many researchers across the globe since the last few decades. In the ideal efficient market,
everyone knows all possible- to-know information simultaneously, interprets it similarly and
behaves rationally. But, the evidence is mixed on whether the market is efficient. While
some
past studies have concluded that the stock markets are efficient, other studies cast doubt on this
conclusion. Stock market efficiency suggests that stock prices incorporate all relevant
information when that information is readily available and widely disseminated, which implies
that there is no systematic way to exploit trading opportunities and acquire excess profits. This
means stock prices follow what statisticians call a ‘random walk’ which holds that stock price
changes are independent of one another. In the normal course of events, the level of prices, i.e.,
the summation of these random movements will show movements that look like a cycle but in
fact are not. This paper is an attempt to provide some empirical evidence on the efficiency of the
Indian stock market in the context of recent global financial crisis. The study by employing the
unit tests on the sample of daily stock returns presents the evidence of weak form market
efficiency in India. Monthly observations were taken for the period January 2004 to December
2009. Monthly returns are not normally distributed as they are negatively skewed. The study
further examines the mean reversion implication of market inefficiency and suggests the
existence of mean reversion illusion in India. In aggregate, it was concluded that the monthly
prices do not follow random walks in India. The investors can take the stream of benefits through
arbitrage process from profitable opportunities across these markets. This study intends to point
out that the stock markets in India have reached a state where any investor can build his / her
own portfolio without any ‘expert’ guidance and still earn returns comparable to professionally
managed funds. Further, the study also attempts to test out the methodology of random investing
by generating a dynamic random investing model using spread sheet.
Key Words:
Indian Stock Market, Efficient Market Hypothesis, Random walk theory, Financial crisis, Mean
Reversion.