Testing Weak Form of Efficient Market Hypothesis: Empirical Evidence from South Asia

Abstract

The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market and no investor is able to earn excess return on the basis of some secretly held private, public or historical information. Efficient market hypothesis (EMH) can be further divided into three sub hypotheses depending upon the information set involved and these are weak form efficient market hypothesis, semi strong form efficient market hypothesis and strong form efficient market hypothesis. This research has examined the weak form of efficient market hypothesis on the four major stock exchanges of South Asia that are Karachi stock exchange (KSE-100), Bombay stock exchange (BSE-SENSEX), Colombo stock exchange (CSE-MPI) and Dhaka stock exchange (DSE-GEN). Historical index values of KSE-100, BSE-SENSEX, CSE-MPI and DSE-GEN on a monthly, weekly and daily basis for a period of 14 Years (July 1997 to June 2011). We applied four different statistical tests including runs test, serial correlation (Durbin Watson test), unit root and variance ratio test. Findings suggest that none of the four major stock markets of south-Asia follows Random-walk and hence all these markets are not the weak form of efficient market.

Keywords: EMH, KSE-100, BSE-SENSEX, CSE-MPI, DSE-GEN, Random-walk, Weak form of efficient market, South Asia

JEL Classification: G14