Weak Form of Efficiency

This research is an empirical investigation of the weak form of efficiency of the Ka-rachi Stock Exchange (KSE-100) Index, which is the prominent index of Pakistan Stock Exchange (formerly Karachi Stock Exchange). The contribution of this paper is to analyze a longer 24 years' sample period (1991-2015) with three frequencies of data – daily, weekly and monthly index returns. The results show that return series of three frequencies have a negatively skewed, leptokurtic and non-normal distribution. The non-parametric Phillips-Perron (PP) test and parametric Augmented Dickey-Fuller (ADF) test rejected the non-stationarity hypothesis for index returns at the level for all daily, weekly and monthly data. The auto-correlation of randomness for the chosen period rejected the Random Walk Hypothesis (RWH) for daily and weekly index returns but documented the existence of RWH for monthly index returns. Lastly, the findings of run tests show market inefficiency on daily and weekly data and efficiency for monthly returns. The findings are not consistent with efficiency theory as the stock returns do not follow the random walk hypothesis and hence nullify weak form of efficiency for daily and weekly returns. However, the research documents weak-form of efficiency for monthly returns; the existence of randomness in monthly data is not surprising for an emerging market like Pakistan which does not have a long memory to remember previous monthly prices. Positioned upon weak form of efficiency assumption, the investors on the KSE can make abnormal returns on the basis of historical share prices (Malhotra, Tandon, & Tandon, 2015). The concept of market efficiency is important for analysts, for investor's investment decisions, and regulators of stock exchange to improve the flow of information. Further research can be done with more sophisticated techniques of testing weak form of efficiency.

In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock Market. For this, daily data for  11sectoral indices on NSE viz. Auto, Bank, Energy, Finance, FMCG, IT, Media, Metal, Pharma, PSU Banks, and Realty Index have been used.  The study period spans from Jan 2004 to Jan 2014 covering a comprehensive 10 years including the recent global financial crisis. The analysis  is done using unit root tests [Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS)]and  Variance ratio tests [Chow Denning Joint Test, LoMackinlay Test and Wright (2000) Test based on Ranks and Signs]. The results suggest that although overall Indian stock market seems to be weak form efficient, but different sectors comprising it are not,  especially during total study period. Further we find evidence of increased inefficiency in Bank, Metal, PSU Bank and Realty sectors in  the post-crisis period. This may be due to investor’s overreaction in Indian stock market. Tripathi & Aggarwal (2009) have reported that  Indian investors tend to overreact to bad news and hence post-crisis, the price discovery mechanism was not so efficient. The findings on  sectoral efficiency in India have important implications for policy makers,  mutual funds, portfolio managers and investors at large. Weak form  inefficiency in Bank, Metal, PSU Bank and Realty sectors is suggestive of exploitable arbitrage opportunities in these sectors. The regulators  and policy makers must also note that overall market efficiency may not imply efficiency at the sectoral level; for this, more efforts and sector  specific reforms need to be taken.