This study examines the random walk hypothesis to determine the validity of weak-form efficiency of the second major stock markets in India, NSE. The study uses daily observation over the span from 3rd July 2007 to 31st December 2011, comprising a total of 1116 observations. The random walk hypothesis is examined using auto correlation function, unit root tests (Augmented Dickey-Fuller test) and the runs test. The ADF and unit root tests clearly reveal that the null
hypothesis of unit root is convincingly rejected in the case of stock market returns of indices, viz. S&P CNX NIFTY and the industry indexes. This suggests that the Indian stock markets do not show characteristics of random walk and as such are not efficient in the weak
form implying that stock prices remain predictable.
The ACF and Unit root test does not show characteristics of random walk and as such are not efficient in the weak form for only some industries indexes such as the banking industry. This implies that the Indian stock markets are not weak form efficient signifying that there is a systematic way to exploit trading opportunities and acquire excess profits. This provides an opportunity for the traders for predicting the future prices and earning abnormal profits in the banking industry. The implication of rejection of weak form efficiency for investors is that they can better predict the stock price movements by holding a well-diversified portfolio while investing in the Indian stock markets.
Weak form efficiency, Auto correlation, Unit root test, Augmented Dickey-Fuller test, Runs test, Random walk, S&P CNX NIFTY