Weak Form of Efficient Market Hypothesis – Evidence from Pakistan

Naimat Ullah Khan · Sajjad Ahmad Khan

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Stock Market Forecasting Methods

Abstract

This research is an empirical investigation of the weak form of efficiency of the Karachi Stock Exchange (KSE-100) Index, which is the prominent index of Pakistan Stock Exchange (formerly Karachi Stock Exchange).The contribution of this paper is to analyze a longer 24 years' sample period with three frequencies of data -daily, weekly and monthly index returns.The results show that return series of three frequencies have a negatively skewed, leptokurtic and non-normal distribution.The non-parametric Phillips-Perron (PP) test and parametric Augmented Dickey-Fuller (ADF) test rejected the non-stationarity hypothesis for index returns at the level for all daily, weekly and monthly data.The auto-correlation of randomness for the chosen period rejected the Random Walk Hypothesis (RWH) for daily and weekly index returns but documented the existence of RWH for monthly index returns.Lastly, the findings of run tests show market inefficiency on daily and weekly data and efficiency for monthly returns.The findings are not consistent with efficiency theory as the stock returns do not follow the random walk hypothesis and hence nullify weak form of efficiency for daily and weekly returns.However, the research documents weak-form of efficiency for monthly returns; the existence of randomness in monthly data is not surprising for an emerging market like Pakistan which does not have a long memory to remember previous monthly prices.Positioned upon weak form of efficiency assumption, the investors on the KSE can make abnormal returns on the basis of historical share prices (Malhotra, Tandon, & Tandon, 2015).The concept of market efficiency is important for analysts, for investor's investment decisions, and regulators of stock exchange to improve the flow of information.Further research can be done with more sophisticated techniques of testing weak form of efficiency.

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References

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