Market Efficiency: An Empirical Analysis of KSE 100 Index
Market Efficiency: An Empirical Analysis of KSE 100 Index
Haroon Mahmood
(Shaheed Zulfikar Ali Bhutto Institute of Science and Technology) haroonmahmood29@gmail.com Dr. Kashif ur Rehman
Iqra University
Abstract
In an efficient market, the actions of the many competing participants, leads to actual prices already reflecting the effects of current information and the actual price of a security to wander randomly about its intrinsic value. The fact that the market is efficient is important for the public economy when it comes to the distribution of scarce resources as it acts as an intermediary of capital distribution from savers to investors through the mechanism of price. In
Pakistan, securities market has a special significance due to its sensitivity to political turmoil, expectations, prospects of stocks and insider’s information. With such indicators, it only seems logical to test the efficiency of the stock market in light of the existence of random walk phenomena. In this study, historical stock
prices on a monthly and daily basis have been used from a sample period of July 1996 to June
2006 of KSE 100 Index Companies. A time line of
10 years has been chosen to test the efficiency of the Pakistani Stock market. Thus, the total number of observations is 121 for monthly data and 2218 for daily data. Consequently, ANOVA method has been used to quantify the data. The results conclude that the Random-walk hypothesis can be accepted for both monthly and daily returns. There is no “day of the week effect” or the ‘month effect’. Thus, the random walk theory is valid for the KSE which can be termed as an efficient market.
Key Words
Efficient Market, Information, intrinsic Value,
Stock Price, Random-walk Hypothesis
1. Introduction
Capital markets play a vital role in mobilizing indigenous resources and channel them effectively for enhanced economic productivity.
Hence, the development of capital markets is the prime
Haroon Mahmood
(Shaheed Zulfikar Ali Bhutto Institute of Science and Technology) haroonmahmood29@gmail.com Dr. Kashif ur Rehman
Iqra University
Abstract
In an efficient market, the actions of the many competing participants, leads to actual prices already reflecting the effects of current information and the actual price of a security to wander randomly about its intrinsic value. The fact that the market is efficient is important for the public economy when it comes to the distribution of scarce resources as it acts as an intermediary of capital distribution from savers to investors through the mechanism of price. In
Pakistan, securities market has a special significance due to its sensitivity to political turmoil, expectations, prospects of stocks and insider’s information. With such indicators, it only seems logical to test the efficiency of the stock market in light of the existence of random walk phenomena. In this study, historical stock
prices on a monthly and daily basis have been used from a sample period of July 1996 to June
2006 of KSE 100 Index Companies. A time line of
10 years has been chosen to test the efficiency of the Pakistani Stock market. Thus, the total number of observations is 121 for monthly data and 2218 for daily data. Consequently, ANOVA method has been used to quantify the data. The results conclude that the Random-walk hypothesis can be accepted for both monthly and daily returns. There is no “day of the week effect” or the ‘month effect’. Thus, the random walk theory is valid for the KSE which can be termed as an efficient market.
Key Words
Efficient Market, Information, intrinsic Value,
Stock Price, Random-walk Hypothesis
1. Introduction
Capital markets play a vital role in mobilizing indigenous resources and channel them effectively for enhanced economic productivity.
Hence, the development of capital markets is the prime
References: [1] Ayadi, O. F., & Pyun, C. S. (1994). "An Application of Variance Ratio Test to the Korean [2] Bashar, A. (2002). "The Capital Markets". [3] Bernard, V., & Thomas, J. (1990). "Evidence That Stock Prices Do Not Fully Reflect the [5] Brown, S., & Goetzmann W. (1995). [6] Chang, K.P., & Ting, K.S. (2000). A Variance Ratio Test of the Random Walk Hypothesis for [7] Charest, G. (1978). Dividend Information, Stock Returns and Market Efficiency-II [17] Harris, L. (1989). A Day-End Transaction Price Anomaly. [8] Chopra, N., J. Lakonishok, & J. Ritter. (1992). [18] Henrikkson, R. (1984) Market Timing and Mutual Fund Performance: An Empirical [9] Claesson, K. (1987). "Effektiviteten på Stockholms fondbörs". [10] Elton, E., et. al, (1993). Efficiency with Costly Information: A Reinterpretation of [11] Fama, E.F., & French, K.R. (1996). [12] Fama, E. F. (1970) Efficient Capital Markets: A Review of Theory and Empirical Work [13] Fama E.F. (1995). Random Walks in Stock Market Prices (1984).Earnings Releases, Anomalies, and the Behavior of Security Prices [15] Grieb, T., & Reyes, M. G. (1999). Random Walk Tests for Latin American Equity Indexes [16] Goetzmannn, W., & Ibbotson, R. (1994). Do Winners Repeat Patterns in Mutual Fund [21] Ikenberry, D., et.al., (1995). Market Underreaction to Open Market Share [22] Ippolito, R. (1989). Efficiency With Costly Information: A Study of Mutual Fund [23] Jegadeesh, N., & Titman S. (1993). Returns to Buying Winners and Selling Losers: