Testing Weak form Efficiency in the Indian Capital Market

Abstract

Market Efficiency Hypothesis is an important notion for investors who wish to hold internationally diversified portfolios. If markets were not efficient task of constructing an internationally diversified portfolio for an investor will be an onerous task. With the increased movement of investments into emerging markets, greater importance is being given to the understanding of the market efficiency in emerging markets. In this paper we test the weak form efficiency or random walk hypothesis for the two major equity markets (BSE and NSE) in India for the period 1997 to 2011. Results of market efficiency are mixed as: for quarterly data, all three methods ADF, PP and KPSS tests support the weak form efficiency for later sample period 2007 to 2011, but slight conflict for earlier period 1997 to 2007 as only PP test shows weak form inefficiency; for monthly data, all three test method are consistent on the weak form efficiency for the period 2007 to 2011 and not efficient for earlier period 1997-2007. For daily and weekly data, all three test methods reject weak form efficiency during all sample periods.