Sectoral Efficiency of the Indian Stock Market and the Impact of Global Financial Crisis
Journal of Commerce & Accounting Research Vol. 4 Issue 1 Jan 2015, pp 46-62
13 Pages Posted: 21 May 2015 Last revised: 27 Aug 2015
Date Written: January 1, 2015
In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock Market. For this, daily data for 11 sectoral indices on NSE viz. Auto, Bank, Energy, Finance, FMCG, IT, Media, Metal, Pharma, PSU Banks and Realty Index have been used. The study period spans from Jan 2004 to Jan 2014 covering a comprehensive 10 years including the recent global financial crisis. The analysis is done using unit root tests (Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS)] and Variance ratio tests [Chow Denning Joint Test, LoMackinlay Test and Wright (2000) Test based on Ranks and Signs].
The results suggest that although overall Indian stock market seems to be weak form efficient, but different sectors comprising it are not, especially during total study period. Further we find evidence of increased inefficiency in Bank, Metal, PSU Bank and Realty sectors in the post-crisis period. This may be due to investor’s overreaction in Indian stock market. Tripathi and Aggarwal (2009) have reported that Indian investors tend to overreact to bad news and hence post crisis, the price discovery mechanism was not so efficient. The findings on sectoral efficiency in India have important implications for policy makers, mutual funds, portfolio managers and investors at large. Weak form inefficiency in Bank, Metal, PSU Bank and Realty sectors is suggestive of exploitable arbitrage opportunities in these sectors. The regulators and policy makers must also note that overall market efficiency may not imply efficiency at the sectoral level; for this more efforts and sector specific reforms need to be taken.
Keywords: Market efficiency, Sectoral efficiency, Weak form market efficiency, Indian stock market, Variance ratio test
JEL Classification: G12, G14
Suggested Citation: Suggested Citation