Testing for Market Efficiency in Emerging Markets: A Case Study of the Karachi Stock Market

Abstract

This paper investigates the efficiency of the Karachi stock exchange (KSE) with corrections for thin trading and non-linearity as suggested by Miller, Muthuswamy and Whaley (1994). Daily, weekly, and monthly data on stock prices from December 1991 to May 2003 have been used, with three non-overlapping periods (December 1991 to May 1998; May 1998 to September 2001; and September 2001 to May 2003) and one combined period (May 1998 to May 2003). The results indicate that the Karachi Stock Market is efficient for the overall period, the three sub-periods, and the combined period in linear and non-linear behavior after making adjustments for thin trading. The same result is observed when the efficiency test is conducted on weekly and monthly data after adjusting for thin trading during the overall study period.

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