Article

Empirical Evidence on Asia-Pacific Journal of Management

Research and Innovation

Weak Form of Efficiency in 8(1) 59–68

© 2012 Asia-Pacific
Institute of Management
Indian Stock Market SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/2319510X1200800107
http://apjmri.sagepub.com
Sunita Mehla
S.K. Goyal

Abstract

SE
The article is an empirical study to examine the validity of weak form of efficient market hypothesis in two most popular indices of
Indian stock market. For examining the hypothesis whether Indian stock markets are efficient in the weak form, two kinds of tests are
conducted. These are parametric and non-parametric tests for randomness, that is, unit root test, autocorrelation test, runs test and

U
variance ratio test. The results suggest that the Indian stock market does not show the characteristics of random walk and as such, is
not efficient in the weak form in daily and weekly returns. However, the monthly returns are found to be inefficient only as per vari-

L
ance ratio test. Thus, the investors can avail excess returns by predicting the future returns as all return series present an opportunity

IA
to investors to gain from the pattern.

Keywords
C
ER
Efficient market hypothesis, autocorrelation, runs test, variance ratio test
M

Introduction selected portfolio of individual stocks with comparable

M

risk.
Efficient market hypothesis (EMH) believes that securities
Fama (1965, 1970), through the empirical analysis of
O

markets are extremely efficient in reflecting information

financial time series, studied the serial independence of
C

about individual stocks and about the stock market as a

returns on risky assets. Following Fama’s work, many cap-
whole. New data are constantly entering the market via
ital market researchers devoted themselves to investigate
R

economic reports, company announcements, political state-

the randomness of stock price movements. Their purpose
ments or public surveys. The accepted view is that when
FO

was to demonstrate efficiency in the capital market.

information arises, the news spreads very quickly and is
incorporated into the prices of securities without delay. The However, many other studies indicate that stock markets
EMH relates to how quickly and accurately the market are not weak-form efficient. This facilitates market partici-
T

reacts to new information. Thus, in the capital market lit- pants to devise a trading strategy which could fetch abnor-
O

erature, EMH is nothing but a relationship between infor- mal profits on the basis of past patterns. The studies con-
ducted by Kulkarni (1978); Chaudhury (1991); Kim,
N

mation and share prices which examines the degree, the

pace and the accuracy of the available information being
incorporated into security prices. If capital markets are
efficient, all the information is incorporated in prices, and
the traders or investors cannot expect to achieve superior
profits by adopting a certain trading strategy. Therefore,
EMH proposes that it is not possible to outperform the
market through market timing or stock selection. Thus,
neither fundamental analysis nor technical analysis would
help investors to select undervalued stocks to earn higher
returns than that could be obtained by holding a randomly
Nelson and Startz (1991); Shiguang and Barnes (2001) do
not support the existence of weak form of efficiency in
capital markets.
Thus, efficiency of stock markets is one of the most
controversial and well-studied propositions in the literature
of capital market. Even if there have been a number of
researches and journal articles on this topic, economists
have not yet reached a consensus about whether capital
markets are efficient or not. In the light of the mixed empir-
ical results in the literature, we are motivated to find the

Sunita Mehla, Associate Professor (Finance), Department of Business Management, CCS Haryana Agricultural University, Hisar.
E-mail: sunitamehla02@gmail.com
S.K. Goyal, Associate Professor (Agricultural Economics), Department of Business Management, CCS Haryana Agricultural
University, Hisar. E-mail: goyalhisar@rediffmail.com
60 Sunita Mehla and S.K. Goyal
empirical support for the EMH in an emerging stock mar-
ket, in particular India. The Indian stock market scene
really picked up after the opening up of the economy in the
early 1990s. There were noticeable changes since 1992 in
the pace of economic growth in the form of transactions,
volume and number of listed companies. The Indian stock
exchanges hold a place of prominence not only in Asia but
also at the global stage. The Bombay Stock Exchange
(BSE), established in 1875, is one of the oldest exchanges
across the world, while the National Stock Exchange
(NSE), a more recent establishment which came into exist-
ence in 1992, is among the best in terms of sophistication
and advancement of technology. The NSE is the third-big-
gest stock exchange in Asia in terms of transactions and is
also among the five biggest stock exchanges in the world in
terms of volume transactions.
With this backdrop, the present article examines the
weak form of efficiency in Indian stock market. The find-
ings of this study will be useful to those involved in invest-
ment decision making in the Indian stock market. The organ-
isational structure of the article is as follows. The second
section reviews the related literature, the third section dis-
cusses the data and methodology of the study. The fourth
section makes the analysis and the last section concludes.
M
Literature Review
M
There have been attempts to investigate the behaviour of
O
stock markets in many countries. The efficiency or ineffi-
C
ciency of securities market has generated a lot of contro-
versy in finance and economics discussions. For instance,
R
Sharma (1983) studied 23 Indian companies listed on the
BSE by using the integrated moving average form of ran-
FO
dom walk and confirmed that the previous shocks do not
apparently influence future shocks. Culter, Porterba and
Summer (1990) found evidence of the mean reversion and
T
predictability of the US stock market return. Kim, Nelson
O
and Startz (1991) examined the random walk pattern of
N
stock prices by using weekly and monthly returns in five
Pacific Basin stock markets. They found that all stock mar-
kets, except Japanese stock market, did not follow random
walk. Butler and Malaikah (1992) examined the behaviour
of individual stock returns employing serial correlation
method and runs test in two stock markets, Saudi Arabia
and Kuwait, over the period 1985–1989. They found that the
Kuwait stock market was efficient, whereas the Saudi Arabia
stock market represented a significant departure from ran-
dom walk theory. Madhusoodanan (1998) found that BSE
sensitivity and national indices did not follow random walk.
Using correlation analysis on monthly stock returns data
over the period January 1981 to December 1992, Olowe
(1999) showed that the Nigerian stock market is weak-form
Asia-Pacific Journal of Management Research and Innovation, 8, 1 (2012): 59–68
efficient. Pant and Bishnoi (2002) analysed the behaviour
of the daily and weekly returns of five Indian stock market
indices for random walk during April 1996 to June 2001.
They found that Indian stock market indices did not follow
random walk. Shiguang and Barnes (2001) tested both
Shanghai and Shenzen stock market for EMH using serial
correlation, runs and variance ratio test to index and indi-
vidual share data for daily, weekly and monthly frequencies
and found that Chinese stock markets were not weak-form
efficient. Abraham et al. (2002) analysed the random walk
hypothesis (RWH) for Saudi Arabia, Kuwait and Bahrain.
Their results could not reject the RWH for Saudi and
Bahraini markets, while the Kuwaiti market failed to follow
a random walk. Cooray and Wickremasingle (2005) exam-
ined weak-form efficiency in the stock markets of India, Sri
SE
Lanka, Pakistan and Bangladesh. They found that stock
markets of India, Sri Lanka and Pakistan were weak-form
U
efficient, whereas weak-form efficiency was not supported
for Bangladesh.
L
Uddin and Khoda (2009) used the Augmented Dickey–
IA
Fuller (ADF) test to investigate the validation of RWH for
Dhaka stock exchange on daily closing prices of 23 com-
C
panies operating in the pharmaceutical sector. They found
ER
that the Dhaka stock exchange did not follow random walk.
The RWH is tested for the Palestinian securities market by
Awad and Daraghma (2009). The findings from the ADF
and Phillips–Perron (PP) unit root tests showed that the
Palestinian securities market followed RWH, whereas
according to the results of serial correlation and runs tests,
the market was inefficient in weak form.
In recent years, the study of stock market efficiency in
developing countries has become more prevalent. This
article is an attempt to capture the trend in the Indian capi-
tal market.
Methodology
The data employed in the study consists of logarithm
returns from daily, weekly and monthly closing price index
of S&P CNX Nifty of NSE of India and BSE Sensex of
BSE of India. BSE Sensex and CNX Nifty are the most
popular market indices and are widely used by market
players for benchmarking. The two stock indices are based
on the selected blue-chip stocks of first largest 30 and 50
companies traded at BSE and NSE, respectively (the data
are available on www.yahoo.com/finance). The span of
time period in sampling of data is restricted due to availa-
bility of data. The data relating to BSE Sensex and CNX
Nifty is available for the period ranging from 1 July 1997
to 18 March 2011 and 12 August 2002 to 18 March 2011,
respectively. The sample generates 3,389 and 2,068 daily
observations, 715 and 444 weekly observations, and 164
Empirical Evidence on Weak Form of Efficiency 61

and 103 monthly observations for BSE Sensex and CNX
Nifty indices, respectively.
In the present study, the variables are log transformed
and then their first differences are used in the analysis. The
closing value of index is differenced in the logs to create
the price change series or returns. The following equation
is used to determine the returns:
Rt = ln(Pt / Pt-1)* 100, (1)
where Rt is daily/weekly/monthly return on the share price
index for the day t, Pt is the closing value of index for the
period t, and Pt–1 is the closing value of the index for the
preceding period.
We will use both parametric and non-parametric tech-
value, we can reject the null hypothesis of random walk in
the series.
Serial Correlation Test
For testing EMH in weak form, serial correlation coefficient
is the most direct and widely used test for an individual time
series. The serial correlation of a time series is simply a cor-
relation between two observations of the same series at differ-
ent dates. In other words, it provides a measure of relationship
between the value of a random variable at time (t) and its
value in the previous period (k). It will indicate whether price
change on day t is influenced by the price changes occurring
k days earlier, where k = 1, 2, 3,…, n. In the present study, we
have considered a time lag of 1 to 10 days.

SE
niques to test the validity of EMH in BSE Sensex and The serial correlation of a time series is given by auto-
CNX Nifty indices of Indian stock market. The parametric correlation function of lag k. Pk is estimated by using:

U
tests employed here are unit root test and autocorrelation
test, while non-parametric tests include runs test and vari- pk = Ck /C0 (3)

L
ance ratio test. Lo and Mackinlay (1988) suggest that

IA
weekly and monthly data are superior to daily figures 1 n−k
since they are free from sampling problems of biases due Ck = ∑ ( X t − X )( X t + k − X ) (4)

C
n t =1
to bid-ask spreads, non-trading, etc., inherent in the daily
ER
prices. Chow and Denning (1993) have stressed that the C0 = Variance of Xt,
variance ratio test requires a sample size of at least 256
observations to have reasonable power against other alter- –
M

where n is the sample size and X is the sample mean. The

native tools. Under these considerations, the weekly obser- serial correlation coefficients are asymptotically independ-
M

vations are the most appropriate data for variance ratio ent and normally distributed with zero mean and standard
test. In spite of its limitations, the daily and monthly obser-
O

deviation of 1/ (n − k ) .
vations would also be included in the study to understand
The statistical significance of any correlation coefficient
C

the dynamics.
can be judged by its standard error which is given by the
R

following:
Unit Root Test
FO

1
It is a test to verify the presence of stationary properties in s pk  = (5)
the time series data. A unit root test is a statistical test for n−k
T

the proposition that in an autoregressive statistical model

To test the joint hypothesis that all the Pk up to certain
O

of a time series, the autoregressive parameter is one. The

presence of unit root in a time series is tested with the help lags are simultaneously equal to zero, the Box and Pierce
N

of ADF test. It tests for a unit root in the univariate repre- (1970) Q-statistic is applied:
sentation of time series. For a return series Rt, the ADF test m

consists of a regression of the first difference of the series Q = n∑ pk2 , (6)
against the series lagged k times as follows: k =1

k where Q is asymptotically distributed as a chi-square dis-

∆ Xt = 1 + 2t + bRt − 1 + ∑ i ∆Rt − 1 + mt (2) tribution with m degrees of freedom, m is the maximum lag
i =1 length. For small samples, Ljung and Box (1978) provide a
finite sample correction that yields a better fit to the chi-
The null hypothesis is H0: b = 0 and H1: b < 1. The square distribution:
acceptance of null hypothesis implies non-stationarity.
Mackinnon’s critical values are used to determine the sig- 
 m
p2 
nificance of the test statistic. If the calculated absolute val- LB = n  n + 2∑ k  (7)
 k =1 n − k 
ues of ADF statistics are higher than Mackinnon’s critical

Asia-Pacific Journal of Management Research and Innovation, 8, 1 (2012): 59–68

62 Sunita Mehla and S.K. Goyal

Runs Analysis actual number of runs being equal to the expected number
of runs is as follows:
Runs analysis is a non-parametric test and is independent
of the normality and constant variance of data. It is a strong
 1
test for randomness in investigating serial dependence in Ac − M ±  
 2
share price movements and compares the expected number Z= ≈ N (0,1) , (10)
of runs with the observed number of runs by a random SM

process.
A run may be defined as a series of price changes of the where Ac denotes actual runs, ½ is the correction factor for
same sign preceded and followed by the price changes of continuity adjustment, in which the sign of the continuity
different signs. Therefore, there are three possible types of adjustment is positive if Ac ≤ M, and negative if Ac ≥ M. Z
price changes in a given share price series, that is, positive, follows a standard normal distribution.
negative and no change. A plus run of length ‘i’ may be For testing the significance of the difference between
defined as a sequence of T positive price changes preceded observed and expected number of runs, ‘Z’ statistic can be
and succeeded by either negative or zero price change. used, where Ac is total number of observed runs of all signs

SE
Similarly, minus or no change price runs can also be defined and ½ is the continuity adjustment. For large N, Z will fol-
for the purpose of runs analysis. The series of change is low normal distribution with mean zero and variance unity.
first replaced by series of symbols, namely, +, − and 0,

U
If |Z| ≥ 1.96, null hypothesis of random price changes will
depending upon whether such changes are positive, nega- be rejected.

L
tive or zero and then, runs are counted. A runs test is per-

IA
formed by comparing the actual number of runs with the
expected number of runs on the assumption that price Variance Ratio Test

changes are independent. If the observed runs are not sig-
nificantly different from the expected number of runs, then it
is inferred that successive price changes are independent. On
the contrary, if this difference is statistically significant, the
M
C
The robust variance ratio test, developed by Lo and Mackinlay
ER
(1988), shows that the variance ratio test is more powerful
than the well-known Dickey–Fuller unit root or the Box–
Pierce Q-tests. The first null hypothesis is stated as follows:

series of price change would be regarded as dependent.

M

Under null hypothesis, the successive price changes are Let Yt denote a time series generated from the following
independent and it is assumed that sample proportions of equation:
O

positive, negative and no price changes are unbiased esti-

C

mates of the population proportions. Yt = m + Yt-1 + et, (11)

Wallis and Roberts (1956) inferred the expected number
R

of runs, M, and the standard error of runs, SM, as follows: where m is an arbitrary drift parameter. The key properties
of a random walk that we would like to test are E(et) = 0,
FO

 3
 for all t, and E(et et–1) = 0, for any positive j.
 n ( n − 1) − ∑ i 2  We may define estimators for the mean of first differ-
M = i −1  and (8) ence and variance:
T

 n 
O

 
  1 T 1
µ= ∑ (Yt − Yt −1 ) = T (Yt − Y0 ) (12)
N

T t =1
 3 2 3 3

 ∑ i ∑ + n(n + 1) − 2n∑ 3i − n3 
2
i
  1 T
SM =  i −1 ∑ (Yt − Yt −1 − µ)2
i =1 i −1
 , (9) σ2 = (13)
 n 2 (n − 1)  T t =1

 
– 2 is an unbiased estimate of s2 based on the one period
s
where n denotes the number of observations; i = 1, 2, 3 difference DYt = Yt – Yt–1. Alternatively, we may consider the
denotes the signs of plus, minus and no change; denotes the q-period difference of Yt, Yt – Yt–q from which we obtain an
total number of changes of each category of signs. estimate of the variance of the q-period difference as follows:
Fama (1965) suggested that when n is large, the expected
1 T
number of runs, M, is approximately normally distributed. σ 2 (q) = ∑ (Yt − Yt −q − qµ)2
Tq t =1
(14)
Furthermore, the standard normal statistic in the test of the

Asia-Pacific Journal of Management Research and Innovation, 8, 1 (2012): 59–68

Empirical Evidence on Weak Form of Efficiency 63

The formula above has taken account of the degree of where

freedom adjustment suggested by Lo and MacKinlay
(1989). Under H0, the variance of the q-period difference   T   
of Yt is qs2. The corresponding variance ratio can be calcu- δ j =  ∑ ( yt − yt −1 − µ ) 2 ( yt − j − yt − j −1 − µ ) 2 
lated as follows: t = j +1 
2
T  2
  ∑ ( yt − yt −1 − µ )  , (17)
VR (q ) = s 2 (q ) / s 2 (1) (15)  t =1 


Lo and MacKinlay show that the variance ratio where T is the number of observations, δ j is the hetero-
z-statistic: scedasticity-consistent estimator, yt is the price of the secu-

rity at time t and µ is the average return.
Var(q ) − 1 is asymptotically N(0,1) for appropriate
Z (q) = 
 −
 s 2 (q )  2
1
choice of estimator s 2 (q ) Results and Discussions

SE
Table 1 presents the descriptive statistics of daily, weekly
and monthly return series of BSE Sensex and CNX Nifty.
Under the independent and identically distributed (iid)
The table clearly shows that the mean return is positive in

U
2 2(2q − 1)(q − 1)
hypothesis, we have the estimator s (q ) = all the three return series of both the indices with the excep-
3qT

L
tion of weekly return series in CNX Nifty, which shows a

IA
(the asymptotic variance of the variance ratio under the negative mean return (−0.0039). It is observed that highest
condition of homoscedasticity). return is observed in monthly series with 0.0164 for CNX

C
Lo and MacKinlay also outline a heteroscedastic Nifty and 0.0087 for BSE Sensex. On comparing daily,
ER
RWH where they weaken the iid assumption and allow weekly and monthly returns in both the indices, CNX Nifty,
for fairly general forms of conditional heteroscedasticity as compared to BSE Sensex, provides better average
and dependence. returns in monthly and daily returns, whereas weekly
M

Under condition of heteroscedasticity, we may estimate returns are better in BSE Sensex. Standard deviation is the
M

the estimator as under: conventional measure of volatility in the returns. The

higher standard deviation for monthly return series satis-
O

2
q −1 2
 2(q − j )   fies the risk-return component of investment. Monthly
s (q) = ∑  .δ j , (16)
C

returns with highest returns also have highest standard

j =1  q 
deviation in both CNX Nifty (0.0799) as well as BSE
R
FO

Table 1. Descriptive Statistics

BSE SENSEX CNX NIFTY

T

Particulars Daily Weekly Monthly Daily Weekly Monthly

O

Mean 0.0004 0.0020 0.0087 0.0008 −0.0039 0.0164

N

Median 0.0011 0.0055 0.0120 0.0016 −0.0092 0.0219

Maximum 0.1599 0.1317 0.2489 0.1633 0.1738 0.2474
Minimum −0.1181 −0.1738 −0.2730 −0.1305 −0.1447 −0.3067
Standard Deviation 0.01734 0.0372 0.0786 0.0177 0.0364 0.07993
Skewness −0.1001 −0.3745 −0.4010 −0.2445 0.5607 −0.7981
Kurtosis 8.2051 4.8573 3.5960 11.7860 5.8482 5.3833
Jarque–Bera 3,831.355 119.480 6.8216 6,672.171 173.339 35.3118
Probability 0.0000 0.0000 0.0330 0.0000 0.0000 0.0000
Observations 3,389 715 164 2,068 444 103
Source: Authors’ calculations.

Asia-Pacific Journal of Management Research and Innovation, 8, 1 (2012): 59–68

64 Sunita Mehla and S.K. Goyal
Table 2. Augmented Dickey–Fuller (ADF) Unit Root Test
BSE SENSEX
Particulars Intercept
Daily −54.207 (0)*
Weekly −16.972 (1)*
Monthly −11.949 (0)*
Source: Authors’ calculations.
Notes: The optimum lag length is indicated within parentheses determined by the Schwarz criteria.
The critical values of ADF statistics are approximately 3.4333, 2.8627 and 3.9625, 3.4119 at the 1% and 5% levels of significance at intercept and
intercept and trend, respectively.
* denotes significance at 1% level and ** denotes statistical significance at 5% level.
Sensex (0.0786). Daily return series has the least standard
deviation. Skewness provides an insight about the asym-
metry in the distribution of the series. For normal distribu-
tion, the skewness should be zero. The table shows that
both the indices have negative skewness for all the three
series of returns except weekly return series in CNX Nifty.
It indicates that stock return series are asymmetric. Further,
the return series have kurtosis greater than 3 in all the three
series which implies a leptokurtic distribution, that is,
peaked tail relative to normal distribution. The Jarque–Bera
test is used for testing the null hypothesis that returns are
normally distributed and the test results indicate that the
M
null hypothesis can be rejected, thereby signifying that the
returns are not normally distributed. Thus, descriptive sta-
M
tistics indicate that all the three return series in both the
O
indices are not normally distributed and are characterised
as leptokurtic and skewed.
C
The ADF unit root test is applied to examine the pres-
R
ence of stochastic and deterministic trends in the given
data. The results are presented in Table 2. In all the three
FO
return series of BSE Sensex and CNX Nifty markets, the
ADF test statistic in absolute term is found to be greater
than absolute critical value at 1 per cent level of signifi-
T
cance. Thus, the ADF test supports the presence of station-
O
arity in all the three return series of both index markets,
N
thereby rejecting the null hypothesis of unit root and pro-
viding the evidence in favour of RWH. The absence of unit
root in return series is necessary but not the sufficient con-
dition for any market to be an efficient stock market.
Table 3 summarises the serial correlation coefficients
and the Q-statistics for the returns on BSE Sensex and
CNX Nifty indices. The sample serial correlation coeffi-
cient for given return series is calculated for daily, weekly
and monthly returns of both indices for lags 1 to 10. The
coefficients provide the information whether any of the
price changes for the previous 10 trading periods can pre-
dict the future returns. For testing the statistical signifi-
cance of individual coefficient at different lags and joint
testing of coefficients, Bartlett test and Q-test are applied,
Asia-Pacific Journal of Management Research and Innovation, 8, 1 (2012): 59–68
CNX NIFTY
Intercept and Trend Intercept Intercept and Trend
−43.400 (0)* −43.391 (0)* −54.212 (0)*
−25.973 (0)* −12.815 (1)* −12.837 (1)*
−11.943 (0)* −09.110 (0)* −09.165 (0)*
respectively. The table shows that the daily returns on indi-
SE
ces of BSE Sensex and CNX Nifty exhibit correlated return
patterns. The result of Bartlett test indicates that serial cor-
relation coefficients of returns at lags 1, 2, 6, 8 and 9 for
U
BSE Sensex are significantly different from zero at 1 per
cent and 5 per cent levels of significance. Similarly, for
L
CNX Nifty, the daily returns are serially correlated only at
IA
lag 6 at 1 per cent and at lags 1, 5 and 6 at 5 per cent level
C
of significance. The Q-statistic shows whether the proba-
bility of autocorrelation is jointly equal to zero or not. The
ER
test also indicates the similar results that the null hypothe-
sis of overall serial correlation coefficient at all lags in
daily returns of BSE Sensex and CNX Nifty are equal to
zero and is rejected by Q-statistics at 1 per cent level of
significance. Moreover, the numbers of positive serial cor-
relation coefficients are greater than the number of nega-
tive coefficients for both BSE Sensex and CNX Nifty. This
signifies that historical information embedded in daily
returns of both the indices has high influence in determin-
ing the future prices. Therefore, weak form of market effi-
ciency does not exist in daily returns of both the indices.
The serial correlation coefficient of weekly returns for
BSE Sensex is significantly different from zero at lags 2
and 9 at 1 per cent and 5 per cent levels of significance. The
remaining serial correlation coefficients are non-significant
according to Bartlett test. Similarly, for CNX Nifty, with
the exception of serial correlation at lag 2, rest all the
remaining serial correlation coefficients are non-statisti-
cally significant. However, the overall serial correlation
coefficient result of weekly returns in both the markets
indicates that the null hypothesis can be rejected by
Q-statistics at 5 per cent level of significance in BSE
Sensex index and at 10 per cent level of significance in
CNX Nifty index. Similar to the result of daily return
series, here too, the numbers of positive serial correlation
coefficients are greater than the number of negative coef-
ficients for both the indices. However, the correlated return
pattern of weekly returns is not as significant as that of
daily returns on the indices of both markets. Therefore,
Empirical Evidence on Weak Form of Efficiency 65

Table 3. Autocorrelation Coefficient on Returns of the BSE Sensex and CNX Nifty Markets

BSE SENSEX CNX NIFTY

Daily Daily
AC PAC Q-Stat Prob. AC PAC Q-Stat Prob.
  1. 0.071* 0.071 16.935 0.000 1. 0.046** 0.046 4.392 0.036
  2. –0.040* –0.045 22.312 0.000 2. –0.040 –0.042 7.640 0.022
  3. 0.004 0.010 22.357 0.000 3. 0.007 0.011 7.737 0.052
  4. 0.020 0.017 23.659 0.000 4. 0.012 0.010 8.060 0.089
  5. –0.031 –0.034 27.027 0.000 5. –0.050** –0.050 13.188 0.022
  6. –0.054* –0.048 36.762 0.000 6. –0.055* –0.049 19.395 0.004
  7. 0.017 0.022 37.745 0.000 7. 0.025 0.026 20.712 0.004
  8. 0.048* 0.042 45.721 0.000 8. 0.041 0.035 24.150 0.002

SE
  9. 0.044* 0.041 52.349 0.000 9. 0.043 0.044 28.008 0.001
10. 0.016 0.014 53.212 0.000 10. 0.007 0.004 28.102 0.002

U
Weekly Weekly
  1. 0.027 0.027 0.533 0.466 1. 0.027 0.027 0.337 0.562

L
  2. 0.092* 0.091 6.609 0.037 2. 0.131* 0.130 8.041 0.018

IA
  3. –0.018 –0.023 6.854 0.077 3. –0.007 –0.014 8.064 0.045

C
  4. 0.018 0.011 7.098 0.131 4. 0.047 0.031 9.063 0.060
ER
  5. –0.021 –0.018 7.405 0.192 5. –0.014 –0.014 9.157 0.103
  6. 0.019 0.017 7.675 0.263 6. 0.036 0.027 9.738 0.136
M

  7. –0.053 –0.050 7.680 0.207 7. –0.047 –0.045 10.739 0.150

  8. 0.060 0.059 12.306 0.138 8. 0.058 0.052 12.288 0.139
M

  9. 0.093* 0.101 18.551 0.029 9. 0.059 0.071 13.872 0.127

O

10. –0.012 –0.032 18.657 0.045 10. –0.085 –0.109 17.190 0.070
C

Monthly Monthly
  1. 0.066 0.066 0.739 0.390 1. 0.096 0.096 0.981 0.322
R

  2. 0.096 0.092 2.295 0.317 2. 0.052 0.043 1.273 0.529

FO

  3. 0.021 0.009 2.367 0.500 3. –0.002 –0.011 1.274 0.735

  4. 0.062 0.052 3.028 0.553 4. 0.145 0.146 3.583 0.465
T

  5. 0.010 0.001 3.046 0.693 5. –0.085 –0.115 4.376 0.497

O

  6. –0.008 –0.019 3.056 0.802 6. –0.132 –0.130 6.308 0.390

  7. –0.064 –0.066 3.775 0.805 7. –0.085 –0.049 7.121 0.416
N

  8. –0.090 –0.085 5.193 0.737 8. –0.054 –0.057 7.452 0.489

  9. 0.026 0.048 5.311 0.806 9. 0.000 0.045 7.452 0.590
10. –0.005 0.010 5.316 0.869 10. –0.047 –0.017 7.714 0.657
Source: Authors’ calculations.
Note: * and ** denote significance at 1% and 5% levels, respectively.

weekly returns of CNX Nifty are less correlated than that
of the BSE Sensex.
The serial correlation of monthly returns on indices of
BSE Sensex and CNX Nifty are extremely different from
those of daily and weekly returns. The series shows that
the Bartlett test and Q-statistics of autocorrelation is
non-significant individually as well as jointly in all the
three series of returns of both markets. Another deviation
in the results of monthly series can be seen with respect
to increase in the number of negative serial correlations
in CNX Nifty index, implying that the index usually
reverse performance in consecutive months.

Asia-Pacific Journal of Management Research and Innovation, 8, 1 (2012): 59–68

66 Sunita Mehla and S.K. Goyal

The larger rate of rejection of null hypothesis of zero
correlation coefficients on daily returns as compared to
weekly and monthly returns is a common phenomenon of
world’s markets (Peirson et al., 1995). The phenomenon
reveals that the larger the interval of the observations of
prices, the less important is the lag price in determining the
future price. Thus, there exists weak form of market effi-
ciency in India in monthly returns where the opportunity to
make excess returns does not exist. On the other hand,
there exists opportunity to have abnormal returns from the
daily returns and to some extent, from weekly returns.
Runs test is a strong non-parametric test for randomness
in investigating serial dependence in share price move-
ments and compares the expected number of runs from a
random process with the observed number of runs. Runs
BSE Sensex and all the three series of CNX Nifty index
conform to the randomness.
The results of variance ratio test for three returns series
on BSE Sensex and CNX Nifty are reported in Table 5. The
table contains the value for variance ratio of the returns
(VRq) using intervals 2, 4, 8, 12, 16, 20, 24, 28 and 30, and
for testing statistical significance of variance ratio, two
related tests, Zq and Zq*, are employed under assumption
of homoscedasticity and heteroscedasticity, respectively.
An estimated variance ratio of more than 1 implies positive
serial correlation and a value less than 1 implies negative
serial correlation. Moreover, if the computed values of Zq*
are smaller than Zq, it indicates the presence of hetero-
scedasticity in the data. In such cases, we rely more on Zq*
for interpretation of data.

SE
test is considered more appropriate as compared to serial In the daily and weekly return series, the results of vari-
correlation test in a situation where skewness and kurtosis ance ratio test under the assumption of homoscedasticity

U
statistics indicate inconsistency with standard normal dis- indicate that the null hypothesis of random walk model for
tribution. Table 4 presents the empirical runs test for daily, all holding periods can be significantly rejected at 1 per

L
weekly and monthly returns of BSE Sensex and CNX Nifty cent level of significance for both BSE Sensex and CNX

index markets.
The result of runs test indicates that the Z statistics for
BSE Sensex significantly rejects the null hypothesis that
the actual number of runs is equal to the expected runs at 1
per cent and 10 per cent levels of significance for daily and
weekly series of returns. However, in the monthly series,
M
IA
Nifty markets. Further, null hypothesis is also rejected in
the presence of heteroscedasticity at all intervals in both
C
the indices. The variance ratio is less than 1 at all intervals
ER
which implies a negative serial correlation in the data. But
the value of variance ratio is decreasing with increase in
intervals such as the variance ratio falls from 0.560 at lag 2

the value of Z supports the null hypothesis. The result of to 0.037 at the interval of 30 lags in BSE Sensex. This indi-
M

runs test for CNX Nifty also supports the null hypothesis in cates the signs of weaker correlation with the increasing
all the three series of return as none of the series is signifi- intervals. Monthly return series also reject the null hypoth-
O

cantly different from zero. The results of runs test support esis for all holding periods in BSE Sensex and up to 12 lags
C

the tests of serial correlation coefficients presented in Table 3. for CNX Nifty at 5 per cent level of significance. Thus,
The positive serial correlation in the first-order results in variance ratio shows slight consistency with the random
R

too few actual runs compared with the expected runs. The walk model after 12 lags only in CNX Nifty index.
FO

negative values of Z confirm the presence of positive first- The aforementioned results of various tests clearly sug-
order serial correlation. The results of runs test for BSE gest that the Indian stock markets do not show characteris-
Sensex confirm that the successive price changes are inde- tics of random walk and as such are not efficient in the
T

pendent for daily and weekly return series, thereby refuting weak form in daily, weekly and monthly returns. The
O

RWH. On the other hand, the Z values for monthly series of results are in consonance with previous studies conducted
N

Table 4. Runs Test

BSE SENSEX CNX NIFTY

Particulars Daily Weekly Monthly Daily Weekly Monthly
Test value 0.0004 0.0020 0.0087 0.0008 0.0038 0.0164
Actual number of runs 1,568 331 85 1,000 212 54
Expected number of runs 1,692 355 83 1,032 219 52
Cases > test value 1,766 391 86 1,091 192 56
Cases < test value 1,623 324 78 977 252 47
Z –4.285 –1.839 0.345 –1.406 –0.672 0.378
Probability 0.000 0. 066 0.730 0.160 0.501 0.706
Source: Authors’ calculations.

Asia-Pacific Journal of Management Research and Innovation, 8, 1 (2012): 59–68

Empirical Evidence on Weak Form of Efficiency 67

Table 5. Variance Ratio Test on Returns of the BSE Sensex and CNX Nifty Markets

BSE SENSEX
Daily Returns
2 4 8 12 16 20 24 28 30
VRq 0.560 0.264 0.128 0.090 0.067 0.057 0.045 0.039 0.037
Zq –25.626* –22.894* –17.151* –14.123* –12.335* –11.047* –10.147* –9.409* –9.094*
Zq* –14.318* –13.679* –11.038* –9.453* –8.477* –7.744* –7.227* –6.789* –6.599*
Weekly Returns
VRq 0.467 0.254 0.122 0.089 0.065 0.054 0.049 0.039 0.038
Zq –14.233* –10.662* –7.931* –6.495* –5.675* –5.089* –4.639* –4.321* –4.169*
Zq* –9.427* –7.497* –6.004* –5.119* –4.576* –4.167* –3.846* –3.615* –3.502*
Monthly Returns

SE
VRq 0.490 0.257 0.155 0.094 0.083 0.062 0.047 0.046 0.046
Zq –6.515* –5.068* –3.648* –3.086* –2.660* –2.411** –2.221** –2.049** –1.976**

U
Zq* –5.370* –4.416* –3.357* –2.895* –2.537* –2.324** –2.159** –2.010** –1.946**
CNX NIFTY

L
Daily Returns

IA
VRq 0.545 0.259 0.126 0.086 0.064 0.055 0.043 0.038 0.036

C
Zq –20.670* –17.996* –13.426* –11.085* –9.668* –8.642* –7.940** –7.354* –7.111*
ER
Zq* –10.438* –9.729* –7.869* –6.779* –6.072* –5.542* –5.181* –4.871* –4.743*
Weekly Returns
M

VRq 0.534 0.245 0.162 0.115 0.087 0.073 0.058 0.053 0.058
Zq –11.608* –8.466* –6.233* –5.113* –4.459* –4.001* –3.659* –3.393* –3.268*
M

Zq* –7.575* –5.928* –4.627* –3.905* –3.475* –3.176* –2.954* –2.778* –2.693*
O

Monthly Returns
C

VRq 0.534 0.245 0.162 0.115 0.087 0.073 0.058 0.053 0.058
Zq –4.711* –4.074* –2.862* –2.385** –2.094** –1.885 –1.736 –1.609 –1.542
R

Zq* –3.943* –3.573* –2.544* –2.128** –1.884 –1.714 –1.597 –1.498 –1.446
FO

Source: Authors’ calculations.

Note: * and ** denote significance at 1% and 5% levels, respectively.
T

by Poshakwale (1996), Pant and Bishnoi (2002), Gupta that is, S&P CNX Nifty and BSE Sensex of NSE and BSE
O

and Basu (2007), Mishra (2009), and Mishra and Pradhan of India. The validity of EMH in Indian stock market is
N

(2009), which signifies that Indian stock market is
predictable.
Conclusion
The proponents of EMH claim that securities markets are
extremely efficient in reflecting information about indi-
vidual stocks and about the stock market as a whole, and as
such any speculation based on past information is fruitless.
This study examines RWH to determine the validity of
weak-form efficiency for two major stock markets in India.
The data consists of logarithm returns from daily, weekly
and monthly closing prices of two most popular indices,
examined by using unit root test, autocorrelation test, runs
test and variance ratio test.
The ADF unit root test is applied to determine the sta-
tionary properties of the series and the result rejects the
null hypothesis in all the three return series of both index
markets. Further, the serial correlation test signifies that
there exists larger rate of rejection of null hypothesis of
zero correlation coefficients on daily returns as compared
to weekly and monthly returns. The results of runs tests for
BSE Sensex confirm that the successive price changes are
independent for daily and weekly return series, thereby
refuting the RWH. On the other hand, the monthly series of
BSE Sensex and all the three series of CNX Nifty index

Asia-Pacific Journal of Management Research and Innovation, 8, 1 (2012): 59–68

68 Sunita Mehla and S.K. Goyal
conform to the randomness. However, the results of vari-
ance ratio test for daily, weekly and monthly returns reject
the null hypothesis for all holding periods in both index
markets.
These results suggest that the Indian stock markets do
not show the characteristics of random walk and as such
are not efficient in the weak form in daily and weekly
returns. However, the monthly returns are found to be inef-
ficient only as per variance ratio test. The results are in
consonance with some previous recent studies conducted
by Gupta and Basu (2007), Mishra (2009) and Mishra and
Pradhan (2009). The implication of rejection of weak-form
efficiency is that it is possible to outperform the Indian
stock market through right market timings and proper stock
selection. The investors and traders can predict the stock
price movements, by holding a well-diversified portfolio,
and can take abnormal profits by using technical and fun-
damental analysis by investing in the Indian stock market.
Therefore, the findings of the study are helpful to those
interested in investment decision making in the stock mar-
ket of India, as it will increase their knowledge about the
pricing process prevailing in the Indian stock market.
References
Abraham, A., Fazal. J. & Sulaiman, A. (2002). Testing the ran-
M
dom walk behaviour and efficiency of the Gulf stock markets.
The Financial Review, 37(3), 469–480.
M
Awad, I. & Daraghma, Z. (2009). Testing the weak-form effi-
O
ciency of the Palestinian securities market. International
Research Journal of Finance and Economics, 32, 7–17.
C
Butler, K.C. & Malaikah, S.J. (1992). Efficiency and inefficiency
in thinly traded stock markets: Kuwait and Saudi Arabia.
R
Journal of Banking and Finance, 16(1), 197–210.
FO
Box, G.E.P. & Pierce, D.A. (1970). Distribution of residual cor-
relations in autoregressive-integrated moving average time
series models. Journal of the American Statistical Association,
T
65(332), 1509–1526.
Chaudhury, S.K. (1991). Short-run share price behaviour: New
O
evidence on weak form of the market efficiency. Vikalpa,
N
16(4), 17–21.
Chow, K.V. & Denning, K.C. (1993). A simple multiple variance
ratio test. Journal of Econometrics, 58(3), 385–401.
Cooray, A. & Wickremasingle, G. (2005). The efficiency of
emerging stock markets: Empirical evidence from the South
Asian region. Discussion Paper, University of Tasmania.
Cutler, D.M., Porterba, J.M. & Summers, L.H. (1990). Speculative
dynamics and the role of feedback traders. American Economic
Review, 80(2), 63–68.
Asia-Pacific Journal of Management Research and Innovation, 8, 1 (2012): 59–68
Fama, E.F. (1965). The behaviour of stock market prices. Journal
of Business, 38(1), 34–105.
——— (1970). Efficient capital markets: A review of theory and
empirical work. Journal of Finance, 25(2), 283–417.
Gupta, R. & Basu, P.K. (2007). Weak form efficiency in Indian
stock markets. IBER Journal, 6(3), 57–64.
Kim, M.J., Nelson, R.C. & Startz, R. (1991). Mean reversion in
stock prices: A reappraisal of the empirical evidence. The
Review of Economic Studies, 58(3), 515–528.
Kulkarni, N.S. (1978). Share price behaviour in India: A spectral
analysis of random walk hypothesis. Sankhya—The Indian
Journal of Statistics, 40, 135–162.
Ljung, G. & Box, G. (1978). On a measure of lack of fit in time
series models. Biometrika, 66(2), 66–72.
Lo, A.W. & MacKinlay, A.C. (1988). Stock market prices do not
follow random walks: Evidence from a simple specification
SE
test. Review of Financial Studies, 1(1), 41–66.
——— (1989). The size and power of the variance ratio test in
finite sample. Journal of Econometrics, 40(1), 203–238.
U
Madhusoodanan, T.P. (1998). Persistence in the Indian stock
market returns: An application of variance ratio test. Vikalpa,
L
23(4), 61–73.
IA
Mishra, P.K. (2009). Indian capital market—Revisiting market
efficiency. Indian Journal of Capital Markets, 2(5), 30–34.
C
Mishra, P.K. & Pradhan, B.B. (2009). Capital market efficiency
ER
and financial innovation—A perspective analysis. The
Research Network, 4(1), 1–5.
Olowe, R.A. (1999). Weak form efficiency of the Nigerian stock
market: Further evidence. African Development Review,
11(1), 54–68.
Pant, B. & Bishnoi, T.R. (2002). Testing random walk hypothesis
for Indian stock market indices (Working Paper Series). IIM
Ahmadabad, pp. 1–15.
Peirson, G., Bird, R., Brown, R. & Howard, P. (1995). Business
finance (6th ed.). Sydney: McGraw-Hill.
Poshakwale, S. (1996). Evidence on the weak-form efficiency
and the day of the week effect in the Indian stock market.
Finance India, 10(3), 605–616.
Sharma, J.L. (1983). Efficient capital markets and random charac-
ter of stock price behaviour in a developing economy. Indian
Economic Journal, 31(2), 53–65.
Shiguang, Ma & Barnes, Michelle L. (2001). Are China’s stock
markets really weak form efficient? (CIES Discussion Paper
No. 0119). Adelaide University, Australia, pp. 1–40.
Uddin, G.S. & Khoda, N. (2009). An empirical examination of
random walk hypothesis for Dhaka stock exchange: Evidence
from pharmaceutical sector of Bangladesh. International
Research Journal of Finance and Economics, (33), 87–100.
Wallis, W. & Roberts, H. (1956). Statistics: A new approach.
Glencoe, I11: Free Press.