Empirical Evidence on Weak Form Efficiency of Indian Stock Market

IntroductionIndia has seen a tremendous change in the secondary market operations especially in the equity market in the past few decades. A series of reforms were introduced to improve investor protection and to increase the efficiency of market operations. Currently Indian stock market is regarded as the barometer of the health of the Indian economy. With the establishment of SEBI and technological advancement Indian stock market has now reached the global standards. The major indicators of stock market development show that significant development has taken place in the Indian stock market during the post-reform period.Adopting international quality in trading and settlement mechanisms and the reduction of transaction costs, removal of barriers to the international equity investment, better allocation and mobilization of resources have resulted in considerable growth in the market volume and liquidity. Together, all these market features infer better market efficiency in Indian stock market.The present study is conducted to provide empirical evidence on market efficiency of Indian stock market. Paper takes care of Weak Form efficiency of Indian stock market. The study was conducted with wide scope both in terms of depth of analysis and breadth of coverage. It has taken a period of 6 years (2004-2009) and daily prices of shares included in the formation of Nifty index. Population consisted of all companies listed in NSE. Sample size was 50 companies forming NSE Nifty Index. While doing the pilot study the researcher found that due to constant revisions by NSE, to make the shares chosen for index construction representative of the population, data for only 29 shares were present throughout the study period of 6 years. So the Weak form efficiency is by taking only 29 shares whose data was present throughout the study period of six years.The study is conducted by employing the statistical techniques like Kolmogorov-Smirov Goodness of Fit Test, Auto-Correlation Test and Runtest on the sample of daily stock returns.The paper proceeds as follows: Section II gives the review of literature. A brief history of the performance of Indian stock market during the study period is included in section III which is followed by Section IV focusing on efficient market hypothesis. Section V investigates the random theory among stocks included in the formation of NIFTY Index by presenting data, methodology and the empirical results. Section VI concludes with some policy implications and recommendations based on the findings of the study.Review of LiteratureNumerous studies and tests have been conducted on all forms of EMH (Turan and Bodla, 2004). Many of these studies have indicated the departure from market efficiency. Bhanu Pant and Bishnoi T.R. (2002) conducted a research on testing random walk hypothesis for Indian Sock market Indices. The analysis of the behaviour of daily and weekly returns of 5 Indian market indices for random walk during April 1996-June 2001 shows that the Indian stock market indices do not follow random walk. The results were based on the tests of Indian stock market indices for normality, autocorrelation using Q-statistic & Dickey-fuller test and also the analysis of variance ratio using homoscedastic and heteroscedastic test estimates.Fama and French (1988) and Lo and Mackinlay (1988) gave evidence against the weak form of market efficiency. The results also indicated positive autocorrelation for weekly holding-period returns not only for the entire sample but also for all sub-periods. Parameswaran (2000), performed variance tests corrected for bid-ask spread and non-synchronous trading on the weekly returns derived from CRSP daily returns file for a period of 23 years. His results show that eight out of ten sorted portfolios do not follow a random walk. He observed that nontrading is not a source of serial correlation in large sized firms.Kirn, Nelson and Startz (1991) examined the random walk process of stock prices by using weekly and monthly returns in five Pacific - Basin stock markets. …