Abstract
This chapter studies the behavior of stock returns in India. For this purpose, data from 1997 to 2010 of 14 indices traded on the National stock exchange (NSE) and Bombay stock exchange (BSE) are used and several parametric and non-parametric methods are employed to empirically test the random walk characteristics of stock returns and examine the weak form efficiency of the Indian stock market. The results from parametric tests are mixed and validity of random walk hypothesis (RWH) is suggested only for large cap and high liquid indices traded on the BSE. However, the same is not true in the case of NSE index returns. The non-parametric tests resoundingly reject the null of random walk for the chosen indices. The results broadly suggest non-random walk behavior of stock returns and invalidate the weak form efficiency in case of India. The evidence of dependence in stock returns call for appropriate regulatory and policy changes to ensure further dissemination of information and quick and correct price aggregation in the market.
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Notes
- 1.
- 2.
The ownership of Share A, denominated in local currency of China are restricted to domestic investors, while Share B denominated in US $ are exclusively for foreign investors. However, Chinese government from 2001 allowed domestic investors to trade Share B.
- 3.
- 4.
This is now known as BSE 100 Index traded on BSE.
- 5.
A detailed discussion on the test and its empirical application can be seen in Campbell et al .(1997).
- 6.
These definitions are independence and identical distributions, independent increments, and uncorrelated elements. Also see Campbell et al. (1997).
- 7.
A detailed discussion on sampling distribution, size and power of the test can also be found in Lo and MacKinlay (1999).
- 8.
For further discussion on runs test, see Siegel (1956).
- 9.
The BDS test discussion is based on Taylor (2005).
- 10.
The issue of alternative specifications like non-linear dependence are detailed in Chap. 4.
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Hiremath, G.S. (2014). Random Walk Characteristics of Stock Returns. In: Indian Stock Market. SpringerBriefs in Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1590-5_2
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