Testing weak-form efficiency of indian stock markets

This study examines the random walk hypothesis to determine the validity of weak-form efficiency for two major stock markets in India. The study uses daily observation over the span from 1st July 1997 to 31st August 2010, comprising a total of 3244 observations. The random walk hypothesis is examined using unit root tests namely, Augmented Dickey-Fuller (1979) test and the Phillips-Perron (1988) test. The ADF and PP unit root tests clearly reveals that the null hypothesis of unit root is convincingly rejected in the case of stock market returns of two major indices, viz. S&P CNX NIFTY and the SENSEX. This suggests that the Indian stock markets does not show characteristics of random walk and as such are not efficient in the weak form implying that stock prices remain predictable. The empirical results do not support the validity of weak-form efficiency for stock market returns of Indian stock exchanges. This implies that the Indian stock markets are not weak form efficient signifying that there is systematic way to exploit trading opportunities and acquire excess profits. This provides an opportunity to the traders for predicting the future prices and earning abnormal profits. The implication of rejection of weak form efficiency for investors is that they can better predict the stock price movements, by holding a well diversified portfolio while investing in the Indian stock markets.