Efficient Market Hypothesis : a study

On Indian Stock Market

Anand Khismatrao (JBIMS)

Abstract : Market efficiency refers to accuracy of information available in the

market and quickness to which prices get reflected in market by that
information. This efficiency as three forms of it. In weak form of market,
market reflects only past prices of stock prices in the current prices of those
stocks and prices can not be analysed by past prices. So we say that current
prices are independent of past prices of any stock. The runs test adopted to
find out market efficiency. In this paper runs test has been used to find out the
weak form of market efficiency. The stock price of the five selected companies
from different sectors has been taken from various Stock Exchanges ie. NSE
BSE of India.
1. Introduction
The Efficient Market Hypothesis (EMH) gives the liberty to stocks to always
trade at their fair value on stock exchanges, as it is impossible for investors
to either purchase undervalued stocks or sell stocks for inflated prices . As
such, it should be impossible to outperform the overall market through
expert stock selection or market timing as the information is disseminated
to all. The Random Walk Model asserts that all price changes are
independent, which implies that future price changes are independent of
past price changes. Samuelson and Fama indicated that the EMH is that
where the share price adjust rapidly to the appearance of new information,
and thus, current prices fully reflect all available information and should
follow a random walk process (Awad and Daraghma, in 2009). The levels of
market efficiency was provided by Fama in 1971, who argued that markets
could be efficient at three levels ie Strong weak and semi strong form of
efficiency, based upon what information was reflected in prices. In this
context , the present paper makes an earnest attempt to analyze the weak
form market efficiency based on the theory of Efficient Market Hypothesis
(EMH) (Fama1965).,.In this the efficiencies of
various top automobile, BFSI and IT companies of India is tested in this
study. The closing stock prices of these companies are taken from NSE
(National Stock Exchange) and are then passed through necessary statistical
tool to obtain whether successive price change is independent or not. The
whole research is being carried out keeping in mind to draw the efficiency
of the Indian Stock Market at weak form with the help of movement of the
closing stock prices over a period of time.
2. Literature Review
In 1986 Ramachandran tested the weak efficiency of the Market Hypothesis
using weekend prices of 60 scrips over the period 1976-81. He used filter
rule tests in addition to runs test and serial correlation tests and found
support for the weak - form of EMH.
In 1997 Seiler and Walter examined the random walk theory. He analyzed
the historical returns of all the stocks listed on the New York Stock
Exchange (NYSE) from February 1885 to July 1962. His study concludes that
changes in historical prices are completely random and this conclusion is
consistent with modern efficient market studies. Keasey and Mobarek
(2000), in their paper investigated the weak-form efficiency of an emerging
market by taking evidence from Dhaka Stock Market of Bangladesh over the
period 1988 to 1997 by employing both parametric and non parametric
tests. The study reveals that Dhaka Stock Market of Bangladesh is weak -
form inefficient.
3. Study Objective
Objective is to find if past prices are dependent on current prices to prove if
market is in the weak efficient form. If prices are independent, weak form
of market exists.
4. Research Methodology
1. Stock prices in the period of four months of five Indian Listed companies
are taken from stock exchange.
2. Stock prices are taken from BSE and NSE in the period of May 2019 to
Aug 2019
3. Five companies are from all five different sectors in India ie. HDFC Bank,
Tata Motors, RIL, Tech Mahindra, Infosys
4. Sources of data are mainly secondary as prices are taken from websites.

5. Research Analysis
While studying the efficient market hypothesis, hypothesis testing has been
taken into account. The hypothesis which is tested under the assumption that
it is true is called null hypothesis and is denoted by H0. The hypothesis which
differs from a given null hypothesis, H0 and is accepted when H0 is rejected is
called an alternative hypothesis and is denoted by H1. Thus, in context of this
research we have,
H0: Past price is not reflected on the present price.
H1: Past price is reflected on the present price.
To prove this hypothesis, Runs test is being taken into account to calculate if
past prices are dependent on current prices.
To test, we need ;
Total number of Runs (r), Number of Positive Price changes (n1), Number of
negative price changes (n2)
Once we get this data, we calculate mean(μ(r)) as : (2n1n2/n1+n2)+1
Standard Deviation : σ(r) = √ (2n1n2(2n1n2-n1-n2)/(n1+n2)^2(n1+n2-1))
Calculating upper and lower limit at 5% of significance.
Lower limit :{ μ-1.96*(σ)} (3) Upper limit :{ μ+1.96*(σ)} (4) Where μ=mean
σ=standard deviation.
RUNS TEST ANALYSIS :
1 . HDFC BANK
Here, Looking at data, runs are traced as followed : + - - - - + - + - + + + - + - +
+ + - + - + - - + -+ - + - - - + - - + + + - - + + - - - - - + + - + - + + - - - + + - - + - - - -
+ - + + -+- -++- -++- -+
= 49
N = 49 n1= 38 n2 = 45
Hence Mean = 42.2
SD = 4.49
Hence, Lower Limit = 32.75 , Upper Limit = 51.64
As 49 is in the range of limits, H0 is accepted
 Thus, market is weakly efficient.

2. Infosys
Here, Looking at data, runs are traced as followed : - - + - + - + + + + - - - - + -
+ + + + + - + + + + - - - + + + - - + - - + - +- + - - - + + + + + + - - - + - + - +++ - + + -
+++-+-+++-++-+++
= 45
N = 45 n1 = 47 n2 = 34
Hence Mean = 40.45
SD = 4.35
Hence, Lower Limit = 31.31, Upper Limit = 49.58
As 40.45 is in the range of limits, H0 is accepted
Thus, market is weakly efficient.

3. RIL

Here, Looking at data, runs are traced as followed : = 43

n = 43 n1 = 35 n2= 48
Hence Mean = 41.48
SD = 4.41
Hence, Lower Limit = 32.21, Upper Limit = 50.14
As 41.48 is in the range of limits, H0 is accepted
Thus, market is weakly efficient.

4. Tata Motors

Here, Looking at data, runs are traced as followed : = 47

n = 47 n1 = 33 n2= 50
Hence Mean = 40.75
SD = 4.33
Hence, Lower Limit = 31.65, Upper Limit = 49.84
As 40.75 is in the range of limits, H0 is accepted
Thus, market is weakly efficient.

5. Tech Mahindra
Here, Looking at data, runs are traced as followed : - + - - + - + - - - - - - - -
--++-+---++-----+--+- -----+-------++-+-------+--- +
++++--+++-++++ -+++
= 32
n = 32 n1 = 30 n2= 53
Hence Mean = 39.31
SD = 4.175
Hence, Lower Limit = 30.53, Upper Limit = 48.08
As 39.31 is in the range of limits, H0 is accepted

Thus, market is weakly efficient.

6. Conclusion
As we analysed five Indian companies of different sectors and found that
all means are falling in the range of upper and lower limits of the runs
test, market for all such companies is weakly efficient. That is, past
prices of market are independent of future prices of stocks in the
market. Hence Efficient Market Hypothesis is proved. As evidences do
not reject the null hypothesis, it favours the random walk theory which
says that prices are independent of each other in efficient market.
 7. References
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capital market: a case of National stock exchange(NSE) and Bombay stock
exchange(BSE),African journal of marketing management,Vol.3(6);June
2011,pp 115-127.
[2]. Osayuwu, Ajao(2012),testing the weak form of efficient market hypothesis
in Nigerian capital market, Vol.1,No.1;May 2012.
[3]. Meredith Beechey, David Gruen and James Vickery, The Efficient Market
Hypothesis : Survey
[4] Petr Makovský, Modern approaches to efficient market hypothesis of
FOREX – the central European case