A study on weak form of market efficiency during the period of global financial crisis in the form of random walk on Indian capital market

Abstract

PurposeThis paper aims to study the weak form of efficiency of Indian capital market during the period of global financial crisis in the form of random walk.Design/methodology/approachThe study considered daily closing prices of S&P CNX Nifty, BSE, CNX100, S&P CNX 500 from April 1, 2005 to March 31, 2010. The data source is the equity market segment of NSE and BSE. Both parametric and nonparametric tests (“ex‐posts” in nature) are applied for the purpose of testing weak‐form efficiency. The parametric tests include Augmented Dickey‐Fuller (ADF) unit root tests and nonparametric tests include Phillips‐Perron (PP) unit root tests and Run test. ADF tests use a parametric autoregressive structure to capture serial correlation and PP tests use non‐parametric corrections based on estimates of the long‐run variance of ΔYt.FindingsThe results suggested that the Indian stock market was efficient in its weak form during the period of recession. It means that investors should not be able to consistently earn abnormal gains by analysing the historical prices. Hence one should not be able to make a profit from using something that everybody else knows.Practical implicationsThe study reports that all the stocks in these selected indices are fundamentally strong and their prices are not influenced largely by historical prices and other relevant factors which came from industry and any other information that is publically available. Thus it can be concluded that the Indian stock market was informationally efficient and no investor can usurp any privileged information to make abnormal profits.Originality/valueWhere past studies have examined the weak‐form of efficiency of various markets and the effect of globalisation and global financial crisis on the various sectors of developing and emerging economies, this paper attempts to study the weak form of efficiency of the Indian capital market in the period of recession in the form of random walk.