TESTING WEAK FORM OF EFFICIENT MARKET HYPOTHESIS (EMH): EMPIRICAL EVIDENCE FROM LEADING STOCK EXCHANGES IN INDIA

Abstract

In recent decades business organisations as well as governments are realizing the importance of capital markets in general and particularly stock markets in the economic growth and development of a country. A truly efficient capital market has great role to play in the development of a country. A market is said to be efficient if prices in the market reflects all private or publicly available or historical information of the concerned security in the market.  Empirical testing of market efficiency in India revealed mixed results – some concluded it is weak form efficient and others have concluded that it is not even weak form efficient. So, in this paper an attempt has been made to test weak form of market efficiency of Bombay Stock Exchange and National Stock Exchange. Daily values of S & P BSE Sensex and Nifty 50 from January 1, 2014 to December 31, 2018 have been used and daily returns have been calculated. The Kolmogorov-Smirnov Goodness of Fit Test result shows non-normal daily returns of both the Sensex and Nifty. Then run test with mean, median and zero as base have been used to test the weak form market efficiency. All the test results for both the Nifty and Sensex have evidenced that the markets are not even efficient in the weak form. To substantiate the conclusion the Augmented Dickey-Fuller test and Philips-Perron test of Stationarity have been used and the results revealed that both Sensex and Nifty return series are stationary at level. As one can model the stationary series and predict the future movements so the market cannot be regarded as efficient.

So, it can be concluded that the Indian stock market is not efficient in the weak form and security prices do not reflect all past information and it is possible to earn super-normal gain by utilizing past information as share prices do not adjust instantaneously in response to any new information release in the market.