Testing of Weak-Form Efficiency in Different sectors of Indian Capital Market

Mayank Chaturvedi IPG_2007 31

Motivation
My area of Interest is finance and want to pursue my professional career in this area . So it would be better to opt for a topic in finance stream. Secondly, the topic is related to market efficiency of Indian market .With the current market situation and the recent recession in the market , I think this topic would help me in gaining some in-depth knowledge about the present stock market not only in India but also globally.

Introduction
India is considered as one of the fastest emerging markets in the world. It has a well established stock market with a long history of organized trading in securities. However, the dominant presence of stock markets by itself does not guarantee growth of the market. The markets have to be efficient in order to provide sustainable growth in a long run(Mukherjee 1971).

Efficient market hypothesis explain that all of the information, which are offered to the public in the markets, reflected in the price of traded on the stock markets so that investors cannot use this information to obtain abnormal gains(Keane, 1983).

Fama (1970) has been the first to develop the efficient markets hypothesis. Fama (1991) classifies market efficiency into three forms weak, semi-strong and strong. Weak-form efficient market is the one that reflects all information of the assets in its current prices hence past prices are not useful for identifying mispriced assets. This paper examines the weak form efficiency of the Indian Stock Markets by applying the Random walk hypothesis on the share prices of various companies included in the S&P CNX Nifty. The Random Walk theory presupposes that the stock markets are so efficient and competitive that there is immediate price adjustment. Thus the random walk theory is based on the hypothesis that the stock markets are efficient. Hence ,this theory later came to known as the efficient market hypothesis(EMH).(Kevin,2001)

International Research
Research Title Publishing Date Objective
A study of the predictive performance of Applied Financial Economics, 2009 the moving average trading rule as applied to NYSE, the Athens Stock Exchange and Alexandros E. Milionis the Vienna Stock Exchange: sensitivity ,and analysis and implications for weak-form Evangelia Papanagiotou market efficiency testing
This work examines the variation of the simple Moving Average (MA) trading rule performance as a function of the MA length in New York Stock Exchange (NYSE), Athens Stock Exchange (ASE) and Vienna Stock Exchange (VSE) using daily data from May 1993 to April 2005. The study investigates the behavior of stock prices in KSE, also tests and analyzes the weak form efficiency of textile sector for improving the understanding of small investors. This paper investigates the empirical validity of the Weak Form Efficient Market Hypothesis for American, European and Asian stock markets. Random Walk Hypothesis is used to prove weak form efficiency in American, European and Asian stock indices

Weak-Form Efficiency of Textile Sector: An Empirical Evidence from Pakistan.

Interdisciplinary journal of contemporary research in business, April 2011 Prof. Dr. Mehboob Ahmad, Dr. Muhammad Ilyas

The weak form market efficiency investigation of American, European and Asian stock markets.

Chinese business review ,October 2010

Nuray Ergl

National Research
Research Title Publishing Date Objective

Weak-Form Market Efficiency in India and Its Emerging Asian Counterparts

IUP journal of behavioural finance , 2010

B J Queensly Jeyanthi

In this study, the existence of weak-form efficiency of Asian emerging stock markets is analyzed. The sample includes the daily price indices namely China (SSEC), Indonesia (JKSE), Kuala Lumpur (KLSE), Korea (KS11), Taiwan (TWII) and India (Nifty) for the period of April 1, 1998 to March 31, 2009.

Efficiency exchange analysis

of the Indian foreign International Journal of market: An empirical Finance,2007

N. Mishra, V. Narisimhan, K.N. Murty

The present study was designed to analyze and empirically verify the efficiency of the Indian foreign exchange market

Gap Analysis
After the review of International and National review paper ,following gap are found in these papers.

The study on market efficiency is not done on the various sector of the market. Overall study has been done at national and international level are all based on overall market test. Implication of the efficiency of various sectors has not been find out like which economic factors are responsible for the efficiency or inefficiency of that specific sector.

Studies has been done on long time interval(10 years) , analysis can be done by breaking the initial duration into 2-3 smaller intervals.

Objectives
The study is focused towards finding the efficiency of the Indian Stock Market.
To test the Weak-Form Efficiency hypothesis on Indian stock market taken S&P CNX Nifty as the reference index from 2001-2011. To test the Weak-Form Efficiency hypothesis on various sectors in BSE Index like FMGC, Telecom,IT etc. Find out the importance and implication of different sectors on the Indian market on the basis of their efficiency . Find out the major economic factor responsible for the efficiency calculated above.

Methodology proposed
For the analysis of Weak-Form efficiency ,stock prices of the various companies listed in the NSE Index is required. Data Sources S&P CNX Nifty. Data Only secondary data is required for the study .The stock prices of various companies can be found from the NSE website. Tools E-VIEWS, MATLAB, MS-Excel are used for the research . Techniques For the Weak-form efficiency testing, random walk(unit test) testing of stock prices is analyzed using following techniques Augmented Dickey-Fuller (ADF) Test. The Phillips-Perron (PP)Test.

Augmented Dickey Fuller (ADF) Test:

It is an extension of Dickey -Fuller test and it can be shown as The number of lagged difference terms is determined empirically. The null hypothesis is that p=a i.e. there exists a unit root. The ADF is limited by its number of lags. It reduces the power of the test to reject the null of a unit root, because the increased number of lags necessitates the estimation of additional parameters and a loss of degree Dickey -Fuller test and it can be shown as

The Phillips-Perron(PP) Test

PP test is an alternative (non-parametric) method of controlling for serial correlation while testing for a unit root.The PP test procedure is based on the following ADF regression wit the same critical values used for ADF: One advantage of the PP tests over the ADF tests is that the PP tests are robust to general forms of heteroskedasticity in the error term. Another advantage is that the user does not have to specify a lag length for the test regression.

ADF test Analysis

Null Hypothesis: H0 = Indian Stock Market does not follows random walk. Alternative hypothesis : H1 = Indian Stock Market follow random. Now for the Analysis of Random Walk of Various Stock prices Taken, We use the following Test also known as Unit root Test. For the First Part of this Research, S&P CNX Nifty Index data is used. The shares included in the S&P CNX Nifty Index cover nearly 23 sectors of the economy with almost 60% of the total market Capitalization of the Indian stock market. The data are collected for 20 out of 50 companies which are traded from 1st April 2000 31st March 2005.The Data is collected from NSE website.

Table 1 Result of Augmented Dickey Fuller Test under three different situations for all the variables included in the study
Name of the Company None Intercepts Intercepts and Trend

ABB
ACC BHEL BPCL CIPLA DR REDDY GRASIM AMBUJACEM HDFC

56.40061
58.47580 57.31245 55.07392 55.07392 56,91431 52.79314 58.86179 63.26520

56.39226
58.47711 57.32474 57.32474 55.06612 56.90696 52.79070 58.85933 63.25656

56.39398
58.39398 57.32036 57.32036 55.05822 56.90169 52.81547 58.85193 63,25955

DLF
INFOSYS ITC MARUTI M&M RANBAXY SAIL SBIN SIEMEN

58.02795
56.52152 57.61564 53.23198 56.52322 55.07392 56.58297 54.54849 55.01150

58,2295
56.51722 57.60826 53.22448 56.53043 55.06612 56.57750 54.56312 55.00383

58.01456
56.53476 57.60753 53.2276 56.54093 55.06612 55.64018 24.55871 54.99595

TATAPOWER
LT

56,36670
54.46746

56.35869
54.46465

56.433545
54.41958

ADF test Analysis contd.

The test is tested at 1% level of significance such as 2.56650 for none,3.432107 for intercepts and 3.960770 for both none and intercepts respectively. From the Table 1, It is clear that in all the three cases ( none, intercept, and none & intercept),all the companies reject null hypothesis as the value is greater than the value calculated from the table.

From the ADF test shows that there is a random walk in the Indian stock market

Table 2 Result of Phillips-Perron(PP) Test with closing prices of all the companies considered in the study
Name of the Company ABB ACC BHEL BPCL CIPLA DR REDDY GRASIM AMBUJACEM HDFC DLF INFOSYS ITC MARUTI M&M RANBAXY None. 56.39398 58.47626 57.30455 55.03788 55.03788 56,89900 52.95140 58.87929 62.43401 58.02744 56.52495 57.61122 53.11389 56.54093 55.03788 Intercepts 56.38558 58.47746 57.31744 55.2994 55.2994 56.89142 52.94708 58.87727 63.4251,1 58.02243 56.52082 57.60373 53.10606 56,54640 55,02992 None and Intercepts 56.37872 58.49651 57,31302 55.24316 55.02192 56.88605 52.96090 58.86987 63.43283 58.1396 56.54710 57.60309 53.10302 56.64917 55.02192

SAIL
SBIN SIEMEN TATAPOWER

56.55567
54.55776 54.99913 56.33121

56.54999
54.56761 54.99137 56.32290

56.61318
54.56232 54.98343 56.40147

LT

54,41184

54.41438

54.41438

ADF and PP test Results

From 2000-2005 , The Indian stock market shows random walk . The Result is based on the NSE index and Major market capitalization companies are taken for the analysis.

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