A STUDY ON TESTING OF EFFICIENT MARKET HYPOTHESIS WITH SPECIAL REFERENCE TO SELECTIVE INDICES IN THE GLOBAL CONTEXT: AN EMPIRICAL APPROACH

Abstract

The word efficiency is quiet difficult to get attached with stock market operations
across the globe. The study of stock market efficiency has become a debatable issue since
the last few years. The result of the debate ends with mixed evidence. Some studies in
this area revealed that the stock markets are efficient at least in the weak form, other
studies cast doubt on the above conclusion. The term market efficiency examines the
degree, the pace and the accuracy of the available information being embedded in to
security prices. Reilly and brown (1997) define “an efficient market as one in which the
stock prices adjust rapidly when new information arise and, therefore, the current prices
of stocks have already reflected all information about the stock thus the market leaves
more pattern to secure economic gains”. Fama (1970) defines “an efficient market as a
market in which prices always reflect the recent available information and states that
three different levels of efficiency exist based on available information – the weak, the
semi strong and the strong forms”. Stock market efficiency at weak form suggests that the
stock prices incorporate all information which implies that no one can exploit trading
opportunities and end up with excess profit. In other words we can say that stock prices
follow a random walk theory.
In this context, the efficiency of the various global stock markets is tested in this
study by the way of taking the respective indices of the stock market and employ a
relevant statistical tool to find out weather successive index change is independent or not.
The basic notion of taking indices to test the efficiency of the stock market is to reveal
that the index of a stock market is based on market capitalization, which in turn
comprises of price of the select script and the volume of trading of the select script. Any
change in the price of the script will lead to change the index of the market. The
movement of the index in a way or other depends on price of the select scripts. By
keeping the idea in the mind this paper is an attempt to trace the efficiency of the global
stock market at weak form with the help of movement of indices over a period of time