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International Journal of Management and Social Sciences Research (IJMSSR) Volume 1, No.

1, October 2012

ISSN: 2319-4421

37

A Systematic Study to Test the Efficient Market Hypothesis on BSE Listed Companies before Recession
Dr S.M.Tariq Zafar Director, Charak Institute of Business Management, Lucknow, U.P ABSTRACT
Stock Market is unpredictable phenomenon and is hard to digest that it provides complete information about the listed stocks and market. The investments made by the investors and their returns are directly based on the up and down movements of the indices of stock exchanges in which the buying securities are listed. Most individuals engage in transaction buying and selling securities (stocks in particular), do so under the general assumption that the securities they are buying are worth more than the price that they are paying, while securities that they are selling are worth less than the selling price. But if markets are efficient and current prices fully reflect all information, then buying and selling securities is an attempt to outperform the market and will effectively be a game of chance rather than skill. The Efficient Market Hypothesis states that at any given time, security prices fully reflect all available information basing on various factors like company disclosures, company announcements, dividend policy of company, company fundamentals and change in government policy etc and these factors are also used as a tool to predict the future prices of stocks. Thus this study is to test the efficient market hypothesis on Bombay stock exchange during the pre recession period from 4th Jan to 24th Dec. 2008. In this study by implementing modern tool like Run test and Autocorrelation on BSE Sensex we will find out whether there is any relationship between the future prices of stock and their past performance through efficient market hypothesis. In last finding, conclusion and recommendation will be given. The finding of study will be useful to investors but it may differ from other study depending upon selected time period. share prices to always incorporate and reflect all relevant information. It is well known fact that share prices appear to follow random walks but why it follows was matter of great concern and thus need answer through a model of share price behavior to explain the random walk. The existing gap was filled by model based on the concept of efficiency of the market in which shares are commonly traded is the efficient market hypothesis (EMH). Under this (EMH) theory it is assumed that capital markets operate to a high degree of perfection. Its foundation base on the random walk hypothesis, which postulates the share price changes are of a random, rather than correlated, nature. The EMH theorist assume that the efficient capital market refers to a market and approach that adjusts rapidly to new information which are costless and are spontaneously transmitted to the markets to establish share prices which are tend to be a fair price, it is a place where there are large numbers of intelligent investors and rational profit-maximizers, competing positively with each other freely in an atmosphere where there is no transaction cost and taxes and all investors take similar views on the implications of current available information which are normally available to all incoming and outgoing participants about current prices and distribution of the future prices of each securities and simultaneously try to predict future market values of individual securities. Under EMH, the adjustment processes tend to allow price to vary randomly around the competitive norms and stock are always traded at their sufficient fair value on stock exchanges, and it is impossible for the general investors to transact, either purchase depreciated value stocks or sell stocks for inflated prices because in efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value. As new information is learnt, prices move, and due to adjustment process, the movement will be up and down depending upon stimulus. This adjustment becomes random due to overreaction of speculators and investors. The EMH emphasizes that it will be impossible to outperform the overall market through selected and expert stock selection or market timing, and simultaneously this prevailing situation is the only ultimate way an investor can possibly obtain higher returns by purchasing riskier investments as EMH refers to the capital market efficiency. In an EMH, prices fully and instantaneously reflect all relevant available information which means that when

Keywords
BSE Sensex; Stock Index; Stock Market; EMH;; Run test, Autocorrelation; Weak form; Semi strong form; Strong form; Random Walk Theory; JEL Classifications: G 14, G15, G17, G10, G11, G12,

INTRODUCTION:
Prejudice is opinion without judgment and thus globally investment theory reflects that it is impossible to beat the market because stock market efficiency causes current

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stocks transaction held, prices normally proves accurate signal for capital allocation. According to Fama that market normally operates in three different forms in term of their level of efficiency, weak, semi-strong & strong, where the level reflected the type or scope of information which will quickly and fully reflected in price and each level designed to correspond with the different types of picking winners investment strategies which were used in practice to try to achieve excessive returns. Weak form of market efficiency doctrine is synonymous with random walk model in which technical analysis is of no use, each share price is assumed to reflect fully the information content of the entire past share price and it prophesies that stock prices have no memory as yesterday has nothing to do with tomorrow. While semi-strong form of efficiency deals only with publicly known information, where fundamental analysis is of no use, in this form the information is assumed to include not only that given by all past share prices but all the public available information relevant to the share value including company announcement, broker reports, industry forecasts and company account and strong form of efficiency deals with complete information in which insider information is of no use. In this form, EMH requires all known information to be impounded in the current share price, whether publically and generally available or not. The strong form of EMH also include what is known as insider information like details of an impending takeover bid confidentially known only to top management of both parties to the bid. An efficient market, i.e., a market that adjusts rapidly to new information Famaetal (1969)

In general an efficient market for securities possesses the following characteristics. Under EMH at any given point of time there is timely and accurate information available on the price and volume of past transactions and on prevailing supply and demand. Under EMH Liquidity always prevail, means transaction of an asset which are bought or sold take place quickly at a price to the price of the previous transaction assuming no new information has been received. Under EMH transaction cost are almost low, means that all aspects of the transaction are carried out on low costs, like the actual brokerage cost involved in the transaction and the cost of transferring the securities and also the cost of reaching the market.

INDIAN STOCK MARKET AND EHM:


As far as Indian stock market is concerned, it is unpredictable and volatile in nature. It is neither fair nor efficient and therefore an investor is subject to added risk. These are the following important factors which distort the efficiency and competitiveness of Indian stock market. In Indian stock market information is neither freely available nor rapidly transmitted to all incoming and outgoing participants. There is unpredictable and rampant price rigging and insider trading. In addition, many companies strategically circulate misinformation to promote market panic which may become their advantage. Due to lack of awareness and low level of education investors information processing capabilities are minute and they are never in position to identify market manipulation. In comparison to growing globalization the organizational infrastructure of the stock markets is not adequate to cope up and accommodate increasing number of securities transactions. In India due to political and capitalist pressure Tax Laws change frequently which make it difficult for common and low profile investors to select securities on long term basis. In general return on fixed interest securities are low due to low rates of interest, which cannot provide an effective hedge against inflation.

ASSUMPTION OF EFFICIENT MARKET HYPOTHESIS:


The basic assumption in an efficient capital market is that, prices of traded securities always fully reflect all public available information concerning the securities and the other general assumptions on which EMH spins are: Investors are rational. Markets are rational. All available information is costless to all market participants. There are no taxes or, more specifically, taxes play no part in financial decision-making. There are no transaction costs. An investor is indifferent between a dollar\ rupee in dividends and a dollar in capital gains. A company and its investors are indifferent between a dollar \ rupee of additional debt and a dollar \ rupee of additional equity.

BOMBAY STOCK EXCHANGE:


Bombay Stock Exchange which is generally known as (BSE Sensex) holds the status of being oldest stock exchange of Asia. It originated as "The Native Share & Stock Brokers' Association in 1875 and by the order of GOI under the Securities Contracts (Regulation) Act 1956 it had earned the distinction of being first permanent recognized stock exchange in the country. To become

CHARACTERISTICS OF MARKET HYPOTHESIS:

EFFICIENT

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world class and to compete globalization, in 1995 it has transformed itself from open outcry system to an online screen based order driven trading system. Since 1875 it has efficiently facilitated and effectively promoted the growth of the Indian corporate sector by providing them scant resource finance for their smooth survival. During the period of study BSE was having the distinction of worlds number 1 exchange in terms of the number of listed companies and was the worlds 5th in transaction numbers. The BSE Index, SENSEX, is Indias first stock market index which can be tracked worldwide due to its iconic stature. It is an index of 30 stocks representing 12 major sectors and is constructed on a 'free-float' methodology, and is sensitive to market sentiments and market realities. Along with this, BSE offers 21 indices, including 12 sectoral indices. Its indices are easily accessible to the investors in Europe and America as it has entered into an index cooperation with Deutsche Brose. Moreover, Barclays Global Investors (BGI), the global leader in ETFs through its iShares brand, has created the 'iShares BSE SENSEX India Tracker' which tracks the SENSEX. The ETF enables investors in Hong Kong to take an exposure to the Indian equity market. It also holds the distinction of listing Exchange Traded Fund (ETF) on BSE, SENSEX, called "SPIcE" first time in the country. During the study period it is found that BSE was efficiently providing effective & transparent market for trading in equity debt instruments and derivatives in more than 359 cities and towns across the India. BSE also has a wide range of services to empower investors and facilitate smooth transactions like Investor Services, the BSE Online Trading (BOLT), and BSEWEBX.com, Surveillance, BSE Training Institute. It has also received awards for its outstanding performance like The World Council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSE's initiatives in Corporate Social Responsibility (CSR). The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31 2007 have been awarded the ICAI awards for excellence in financial reporting. The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its efforts in employer branding through talent management at work, health management at work and excellence in HR through technology. To be leader it has set a vision to emerge as the premier Indian stock exchange by establishing global benchmarks which BSE will achieve in coming years and its growth and development will be continuing process. Drawing from its rich past and its equally robust performance in the recent times, BSE will continue to remain an icon in the Indian capital market.

whether there is any relationship between the future prices of stock and their past performance. Further, to understand the practical applicability of Efficient Market Theory, to investigate whether prices of stocks in Bombay Stock Exchange follow a Random Walk process as required by the market efficiency theory and scientifically analyzing the impact of relationship on investors perception.

METHODOLOGY:
The study is done with special reference to the most preferred and trusted BSE Sensex of India. For the purpose market prices of fifty-two weeks have been taken from all the thirty companies and firms listed and involved in the formation of index of BSE Sensex. The research is descriptive in nature and judgmental sampling technique has been used to analyze the weak form of efficient market hypothesis. For the study secondary data are used which was collected from the websites of BSE Sensex, various government records, published national document, magazines and website of respective companies for the period of Ist January 2008 to 31st December 2008.

HYPOTHESIS FORMULATION:
Null Hypothesis (Ho): The price movement in the share prices of BSE is not affected by past prices. Alternative Hypothesis (Ha): The price movement in the share prices of BSE is affected by past prices.

MODERN TOOLS AND TECHNIQUES:


In this study, for interpreting the results modern financial analysis have been carried out which minutely evaluates and examine relevant components for companies smooth functioning like Liquidity Analysis in which Current Ratio, Liquidity Ratio are tested, in Profitability Analysis in Relation to Sales G. P Ratio, N. P Ratio, O. P Ratio are tested and in Relation to Investment Return on Equity, Return on Assets, Return on Investment are tested, in Efficiency Analysis: Fixed Assets Turnover Ratio, Stock Turnover Ratio, Debtor Turnover Ratio are tested, in Leverage Analysis: Capital Gearing Ratio, Debt Equity Ratio, Interest Coverage Ratios are tested, in Market Value Analysis, Earnings Per Share, Price Earnings Ratio, Book Value Per Share are tested further, SD and CV, the Sum of Mean Values and Average score are calculated. After judicious evaluation of all performance parameters companies are ranked according to their performance. The outcome of the study depends on the selected period by the researchers which may differ from other analysis.

OBJECTIVES OF THE STUDY:


The investments made by the investors and their returns are directly based on the up and down movements of the indices of stock exchanges in which the buying securities are listed. The core objective of study is to find out

ANALYSIS TOOL AND TECHNIQUES:


In this study, for interpreting the results modern financial tools have been used to judge the market efficiency which minutely evaluates and examine relevant components required for efficient market hypothesis.

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Modern tool like Run test has been used to check the weak form of efficiency and Autocorrelation has been used to check correlation (positive or negative) between the share prices after the passes of time. The Run Tests was developed by Western Electric and later with some improvements by Nelson. It is a nonparametric test that is used to checks a randomness hypothesis for a two-valued data sequence or it can be said that it is used to test the hypothesis that the elements of the sequence are mutually independent. It is also known as Wald-Wolfowitz test. In Run Tests 1, 2, 5, and 6 are applied to the upper and lower halves of the chart separately. Run Tests 3, 4, 7 and 8 are applied to the whole chart Run Test 1: (Western Electric: point beyond three sigma) an indication that the process mean has shifted. Run Test 2: (Nelson: nine consecutive points same side of average (note: Western Electric uses eight consecutive points same side of average)) an indication that the process mean has shifted. Run Test 3: (Nelson: six consecutive points increasing or decreasing) an indication that the process mean has shifted (a trend). Run Test 4: (Nelson: fourteen consecutive points alternating up and down) an indication of sampling from multi-stream process (subgroups alternate between two or more process levels). Run Test 5: (Western Electric: two out of three consecutive points beyond two sigma) an indication that the process mean has shifted. Run Test 6: (Western Electric: four out of five consecutive points beyond one sigma) an indication that the process mean has shifted. Run Test 7: (Western Electric: fifteen consecutive points between plus one sigma and minus one sigma) an indication of stratification in sampling (multi-stream sampling within a subgroup). See also: Run Test 7 Run Test 8: (Western Electric: eight consecutive points beyond plus one sigma and minus one sigma (both sides of center)) an indication of sampling from a mixture (multistream sampling, subgroups on each side of center from separate distributions). Mean

LIST OF COMPANIES FRAMING BSE SENSEX 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 ACC LTD BHEL BHARTI AIRTEL DLF GRASIM IND. HDFC HDFC BANK HINDALCO IND. HUL ICICI INFOSYS TECH ITC JAIPRAKASH ASSO LERSEN & TUBRO MAHINDRA & MAHINDRA 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 MARUTI SUZUKI NTPC ONGC RANBAXY RELIANCE COM RELIANCE INDUSTRIES RELIANCE INFRASTRUCTURE SBI STERLITE SUN PHARMA TCS TATA MOTOR TATA POWER TATA STEEL WIPRO

HISTORY & LITERATURE REVIEW:


The efficient-market hypothesis was first expressed by Louis Bachelier, a French mathematician, in 1900, his Theory of Speculation" was much ahead of his time and thus unfortunately it went largely unnoticed and ignored for over 50 years. The given hypothesis by him states that the stock market is a highly efficient pricing mechanism. Efficiency in this context does not refer to the organizational and operational aspect of the market or to the efficient allocation or resources within the economy, but to the capacity of the market to convert information into share prices. The mathematical expectation of the speculator is zero" and he described this condition as a "fair game. Later efficient-market hypothesis emerged as a prominent theoretic position in the mid-1960s. The strategies EMH came in light with Nobel Laureate Paul Samuelson, his 1965 article has proven to a large extent that properly anticipated prices fluctuate randomly. But in 1970 Chicago finance professor Eugene Fama gave new dimension and then after Efficient Capital Market became operational with the foundational epithet that in efficient markets, price fully reflect all available information.. Burton Malkiel of Priceton in his bestseller a Random Walk down Wall Street suggested the throwing darts at the newspaper stock listing which according to him is a good way to pick stock. John Maynard Keynes (1936), in his study compared the stock market with a casino and said that market guided by animal spirit for

Variance

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fulfilling short run speculation motives arising from short run prices movements and are largely not interested in holding an investment strategically for long run benefit. Sabur Mollah in his study in his study found that Market Efficiency is an area of enormous interest in financial literature. Slutzky (1937) in his study observed that any series can be created from a series, which is purely random. By suitable weighting and averaging the random series, we can obtain a series with sharp peeks. Sensex series, which are obtained as weighted average of individual stock series may have this spurious effect. Therefore, it may be necessary to do spectral analysis on individual stock series than on Sensex. Sharpe and Cooper (1972) in their study argue that diversification across the stocks results in decline of portfolio risk, thereby, reduction of non-market risk. As a result, market risk should be assumed as the proper measure of portfolio risk. In an efficient capital market, rational investors, being risk averse, will demand increasing return for increasing risk. They are ready to take extra risk only with the expectation of gaining extra risk premium. Basu (1977) investigates the efficient capital market by examine the investment performance of common stocks in relation to their P/E ratios. The findings indicate that average annual rate of return decline from the movement from low P/E ratio portfolio to high. Kim, Nelson & Startz (1991) in their study found that the mean reversion was only a phenomenon of the pre-World War II period, and not a feature of post-war period. Further they found that the variance ratio tests produced positive serial correlation. Malkiel (1992) in his study explained that capital market is said to be efficient if it fully and correctly reflect all relevant information in determining security prices. Ayadi & Pyun (1994) in their study found that South Korean market does not follow random walk when tested under homoscedastic error term assumption and follows random walk when test statistic in corrected for heteroscedasticity. Urrutia (1995) in his study examined weak form of efficiency and provides mixed evidence on the weak form efficiency for the stock markets in Argentina, Brazil, Chile, and Mexico. Fawson (1996) in his study explored the weak form of EMH and said that current market prices of stocks are independent on their past prices. Gupta O P and Gupta V (1997) in their study explain in his study a re-examination of weak from efficiency of Indian stock market in which he look at BSE 100 with 100 stocks for 12 years of time period and examine the beta value and relate it with market efficiency. The results of the study are that Indian market is weak on daily bases. Fama (1998) further suggested simple market efficiency theory in which he emphasized that the expected value of abnormal return is zero, but chance generates deviation from zero (anomalies) in both directions. Alam (1999) in his study revealed that random walk hypothesis cannot be rejected for stock price changes on the Bombay (India) and Dhaka Stock Exchange (Bangladesh) respectively. M. Kabir Hassan, Neal C. Maroney Hassan Monir El-

Sadyand Ahmad Telfah(1999), in their study examined volatility and predictability, and explains how portfolios of stocks can be formed from Middle East and Africa countries in order to achieve meanvariance efficient portfolios. This paper generally finds that country political, financial and economic risks significantly determine stock volatility and predictability. Ramasastri (1999) in his study tested Indian stock market for random walk during post liberalization period using three Dickey Fuller hypotheses and reluctantly indorsed the null hypothesis that stocks prices are random walks. Parameswaran (2000), in his study performed variance ratio tests corrected for bid-ask spread and nonsynchronous trading on the weekly returns derived from CRSP daily returns files for a period of 23 years. His result shows that eight out of ten sorted portfolios do not follow a random walk. He observed that non-trading is not a source of serial correlation in large sized firms. Barman and Samanta (2001) in their study examine the EMH in Indian market and explain that his study finding do not support the EMH the stock market. The volatility test also exhibits the prances of excess volatility in the return series. The study also accepts the hypothesis of no integration between real price and real dividends series indicating the lack of market efficiency, Abraham (2002) in his study produced evidence to reject the hypothesis of weak form efficiency for stock markets in Sri Lanka, Kuwait, Saudi Arabia and Bahrain. Debasish and Mishra (2003) in their study investigate random walk hypothesis in the Indian stock market. The empirical results support the information efficiency and RWH more in case of daily stock return and weekly stock return as compared to the case of stock indices return on monthly basis. Ramasastri, A.S (2007), in their study on stock market efficiency spectral analysis found that Indian stock market is efficient enough and spectral analysis revealed that there is a presence of periodic cycles in the movement of share prices. S.V. Ramana Rao & Naliniprava Tripathy (2008) in their study consider Indian stock market is being regarded as the barometer of the health of the economy. The study concludes that the market would react very sharply to economic, political and policy issues. Hence the market participants should be taken care of their portfolio while investing in these volatile months. Dr S.M.Tariq Zafar (2009) in his study attempted to measure the efficiency of Indian stock market in terms of risk and return relationship and the effect of diversification and found that holding risky stocks in portfolio for longer time horizon investor do not realize maximum return in trading but up to some extent they reduce the impact of nonmarket risk of the portfolio and also revealed that portfolios with high beta value are categorized as high risky class and portfolios with low beta value are categorized as low-risky. They get the high return by holding risky portfolio on daily basis. This trend of stock market signifies effect that investor gradually readjust

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their holdings of stocks in response to market or nonmarket ever.

CRITICS OF HYPOTHESIS:

EFFICIENT

MARKET

The introduction, acceptance and recognition of efficient market hypotheses have revolutionized the stock market, but it cannot be said that it is ultimate answer to all stock market complexities. Worldwide researchers and investors have different opinion about EHM empirically and theoretically which are largely influenced by the logic of socialism and capitalisms. Psychologists and behavioral economists such as Daniel Kahneman, Amos Tversky, Richard Thaler, and Paul Slovic have relatively contrast opinion about EMH. According to them market is relatively imperfect due to predictable and deliberate human errors in reasoning and information processing along with combination of cognitive biases such as overconfidence, overreaction, representative bias, information bias, an inability to use configural rather than linear reasoning, Errors of reasoning influenced most investors to avoid high value stock and buy expensive and manipulative growth stocks, which allow those investors who reason correctly to profit from bargains in neglected value stocks and the overreacted selling of growth stocks. Shiller suggests that Long-term investors are confident and well informed and would be advised to minimize their exposure to the stock market when it is high, and become active when market is low and further he pointed, that these correlations between price to earnings ratios and long-term returns are impossible to explain by the efficient-market hypothesis. Dreman, (1995) reveled that low P/E stocks have greater returns. Earlier in (1992) he examined and refuted the assertion by Ray Ball that these higher returns could be attributed to higher beta. Later study produced that beta cannot account for this difference in average returns. According to him, the tendency of returns to reverse over long period in which losers become winners is another contradiction of EMH which is impossible to explain. Losers would have to have much higher betas than winners in order to justify the return

difference. These errors in reasoning lead most investors to avoid high-value stocks and buy growth stocks at expensive prices, which allow those who reason correctly to profit from bargains in neglected value stocks and the overreacted selling of growth stocks. Shiller states that Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low." This correlation between price to earnings ratios and long-term returns is not explained by the efficient-market hypothesis. According to Dreman, in a 1995 paper, low P/E stocks have greater returns. In an earlier (1992) paper he also refuted the assertion by Ray Ball that these higher returns could be attributed to higher beta. Later study showed that beta cannot account for this difference in average returns. This tendency of returns to reverse over long horizons (i.e., losers become winners) is yet another contradiction of EMH. Losers would have to have much higher betas than winners in order to justify the return difference. Further study showed that the beta difference required to save the EMH is not there. As John Maynard Keynes commented, "Markets can remain irrational longer than you can remain solvent." Sudden market crashes as happened on Black Monday in 1987 are mysterious from the perspective of efficient markets, but allowed as a rare statistical event under the Weak-form of EMH. Nobel Laureate Daniel Kahnemanannounced his skepticism of investors beating the market: "They're [investors] just not going to do it [beat the market]. It's just not going to happen. Richard Thaler (2008) report he identified complexity and the herd behavior as central to the global financial crises of 2008. In addition, market liquidity is a critical component and play dominant role in capturing "inefficiencies" in tests for abnormal returns. It is hard and fast fact for anyone to adjudicate the market efficiency as he cannot predict that model will correctly stipulates the required rate of return? Consequently, unpredictable situation can arise in future any time. It is also found that it is not possible to predict that weather market is inefficient or the asset pricing model is incorrect, under these conditions one cannot get both answers at the same time.

EFFICIENCY TESTING THROUGH RUN TEST


Table 1.1: Counting of Runs of ACC, BHEL, AIRTEL, DLF, GRASIM Date Average Variance Standard Deviation Z-Values ACC LTD RUNS 26.02 12.02 3.467 -1.448 BHEL BHARTI RUNS AIRTEL RUNS 26.412 26.02 12.407 12.02 DLF GRASIM RUNS INDSTRIES 26.25 12.25 3.5 -1.787 RUNS 25.31 11.34 3.367 -0.687

3.5223 3.467 1.3026 0.571 SOURCE: Manual counting and calculation

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Table 1.2: Counting of Run for HDFC, HDFC BANK, Hindalco, HUL,ICICI
Date Average Variance Standerd Deviation Z-Values HD FC RUNS 25.70 6 11.71 3 3.422 5 1.546 9 HDFC BANK RUNS 26.02 12.02 3.467 1.725 HINDALCO INDSTRIES RUNS 24.2 9 10.3 9 3.22 3 0.21 9 HUL RUNS 26.25 5 12.25 1 3.500 2 0.784 3 ICICI RUNS 25.70 6 11.71 3 3.422 5 0.498

SOURCE: Manual counting and calculation Table 1.3: Counting of Run for Infosys, ITC, Jaiprakash, L&T, Mahindra& Mahindra
Date Average Variance Standerd Deviation Z-Values Infosys Tech. RUNS 26.02 12.01 9 3.466 9 0.871 ITC RUNS 26.25 5 12.25 1 3.500 2 2.784 2 Jaiprakash Associates RUNS 24.84 3 10.89 3 3.300 5 1.467 L&T RUNS 26.2 5 12.2 5 3.5 0.359 M&M RUNS 24.8 4 10.8 9 3.3 0.65 4

SOURCE: Manual counting and calculation Table 1.4: Counting of Run for Maruti, NTPC, ONGC, Ranbaxy, Reliance Communication
Date Average Variance Standerd Deviation Z-Values Marut i Suziki RUNS 25.24 5 11.74 1 3.426 5 1.679 6
NTPC

RUNS 26.412 12.407 3.5223 -0.117

ONGC

RUNS 26.02 12.01 9 3.466 9 1.436 6

Ranbaxy

RUNS 26.02 12.01 9 3.466 9 1.436 6

Reliance Com.

RUNS 21.459 6.6352 2.5759 -0.566

SOURCE: Manual counting and calculation Table 1.5: Counting of Run for Reliance Industries, Reliance Infra, SBI, Sterlite, Sun Pharma
Date Average Variance Standerd Deviation Z-Values Relianc e IND. RUN S 24.84 3 10.89 3 3.300 5 2.168 4 Relianc e INFRA RUN S 24.84 10.89 3.3 2.376 S BI RU NS 26.4 9 12.4 9 3.53 3 0.42 7 Sterlite RU NS 26.0 2 12.0 2 3.46 7 -0.29 SUN Pharma RUNS 26.02 12.02 3.467 -0.58

SOURCE: Manual counting and calculation

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Table 1.6: Counting of Runs for TCS, Tata Motors, Tata Power, Tata Steel, Wipro
Date Averag e Varian ce Standa rd Deviation ZValues 11.34 3.367 0.501 10.89 3.3 0.654 12.41 3.522 0.735 10.39 3.223 0.402 9.822 3.134 0.213 TCS RUNS 25.31 TATA MOTORS RUNS 24.84 TATA POWER RUNS 26.41 TATA STEEL WIPR RUNS 24.29 O S 23.67 RUN

SOURCE: Manual counting and calculation Table 1.7: Z-Values Calculation through Run Test Using Following Formula (Z=R- / )
S.NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 COMPANY NAME ACC LTD BHEL BHARTI AIRTEL DLF GRASIM IND. HDFC HDFC BANK HINDALCO INDUSTRIES HUL ICICI INFOSYS TECHNOLOGY ITC JAIPRAKASH ASSOCIATES LERSEN & TUBRO MAHINDRA & MAHINDRA MARUTI SUZUKI NTPC ONGC RANBAXY RELIANCE COM RELIANCE INDUSTRIES RELIANCE INFRASTRUCTURE SBI STERLITE SUN PHARMA TCS TATA MOTOR TATA POWER TATA STEEL WIPRO Z-VALUES -1.447877 1.3026078 0.5712326 -1.787034 -0.687172 1.5468576 1.7250094 0.2190277 0.7842784 -0.498432 -0.870988 2.7841883 -1.467412 -0.358527 0.6535035 1.6795759 -0.116901 1.4365652 1.4365652 -0.566413 2.1684435 -2.376376 0.4272901 -0.2941 -0.582544 0.50082 0.6535035 0.7348044 -0.401551 -0.212718

SOURCE: Calculation through MS: Excel

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INTERPRETATION THROUGH RUN TEST:


The calculated values of run test (Z) are compared with the critical value at 5% level of significance. Out of the 30 companies, the value of Z of all companies except ITC and Reliance Industries was less than the critical value of 1.96 at 5% level of significance. So, the null hypothesis that the price movement in the share prices of Bombay Stock Exchange is not affected by past prices is accepted. The result shows that the price movements in share prices of Bombay Stock Exchange are random in behavior. We can not use the historical prices for predicting the future prices. This study has proved that the weak form of market efficiency or the random walk theory is applicable in the Bombay Stock Exchange.

Autocorrelation is the cross-correlation of a signal with itself. It is also termed as lagged correlation or serial correlation. It is a mathematical tool for finding repeating patterns, such as the presence of a periodic signal. When computed, the resulting number can range from +1 to -1. An autocorrelation of +1 represents perfect positive correlation while a value of -1 represents perfect negative correlation. Its values are useful for computing for security analysis. Successive values in time series are often correlated with one another. This persistence is known as serial correlation it can be explored by estimating the sample autocorrelation coefficients by using following formula.

EFFICIENCY TESTING AUTOCORRELATION

THROUGH
where Table 1.8 Results through Autocorrelation is the time lag.

S.NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

COMPANY NAME ACC LTD BHEL BHARTI AIRTEL DLF GRASIM IND. HDFC HDFC BANK HINDALCO IND. HUL ICICI INFOSYS TECH ITC JAIPRAKASH ASSO LERSEN & TUBRO MAHINDRA & MAHINDRA MARUTI SUZUKI NTPC ONGC RANBAXY RELIANCE COM RELIANCE IND. RELIANCE INFRA SBI STERLITE SUN PHARMA TCS

t+1 0.909296 0.856766 0.85661 0.924909 0.952027 0.92376 0.004919 0.976507 0.737409 0.938661 0.951085 0.877623 0.909533 0.965398 0.953956 0.887501 0.827285 0.895694 0.981291 0.966384 0.961075 0.913291 0.924372 0.967242 0.900483 0.974402

t+2 0.839559 0.777572 0.729047 0.823357 0.908477 0.885079 -0.02212 0.958066 0.603232 0.862634 0.890488 0.770367 0.819039 0.920939 0.912367 0.867889 0.636149 0.767414 0.959108 0.909562 0.907624 0.818593 0.838937 0.929354 0.815767 0.94904

t+3 0.769385 0.688497 0.638348 0.749711 0.854325 0.814089 -0.02684 0.940743 0.467217 0.793963 0.834653 0.640682 0.720887 0.871403 0.887001 0.788738 0.497348 0.625912 0.937278 0.863921 0.853038 0.741381 0.742689 0.894083 0.754244 0.919105

t+4 0.737816 0.628882 0.561011 0.697339 0.824825 0.796331 -0.03174 0.940573 0.227256 0.726686 0.75871 0.522606 0.682723 0.823909 0.871421 0.748023 0.398436 0.556331 0.902205 0.832879 0.820238 0.668163 0.644314 0.876834 0.63191 0.888738

t+5 0.718418 0.557858 0.473783 0.667178 0.785877 0.688043 -0.03722 0.925755 0.140855 0.664241 0.634543 0.448995 0.552013 0.772293 0.830062 0.635718 0.345017 0.440476 0.837002 0.801169 0.784136 0.580739 0.569402 0.844923 0.551014 0.885877

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27 28 29 30

TATA MOTOR TATA POWER TATA STEEL WIPRO

0.98946 0.972955 0.958643 0.919591 0.884399 0.811257 0.984608 0.968335 0.944511 0.969425 0.932806 0.899675 SOURCE: Calculation through MS: Excel

0.934497 0.786923 0.930888 0.865509

0.900691 0.786901 0.902457 0.802456

INTERPRETATION:
The serial correlation is calculated for weekly share prices of Sensex for the period 1st January 2008 to 31st December 2008. the correlation is calculated between the share prices of any period t & t+1,between t & t+2, between t & t+3, between t & t+4& between t & t+5.to analyze the result, the three limits of correlation coefficient have been taken. These limits are 0 to .25 (low correlation),.25 to .75 (moderate correlation)& .75 to 1 (high correlation). From the table, it is analyzed that out of 30 companies analyzed for correlation between t & t+1,1 company has shown low correlation, 1 company has shown moderate correlation and 28 companies have shown high correlation. From the table it is also analyzed that out of 30 companies, for correlation between t & t+2, 1 company has shown low correlation, 2 company have shown moderate correlation and 27 companies have shown high correlation. From the table it is also analyzed that out of 30 companies, for correlation between t & t+3, 1 company has shown low correlation, 10 company have shown moderate correlation and 19 companies have shown high correlation. From the table, it is also analyzed that out of 30 companies, for correlation between t & t+4, 2 company have shown low correlation, 14 company have shown moderate correlation and 14 companies have shown high correlation. From the table, it is also analyzed that out of 30 companies, for correlation between t & t+5, 2 company have shown low correlation, 16 company have shown moderate correlation and 12 companies have shown high correlation. The numbers of companies in low correlation group were increasing after the period of t+4. The number of companies in moderate correlation group were increasing after the period oft+1&t+2 significantly. The number of companies in high correlation group goes on decreasing for the period fromt+1 to t+5. Large number of companies shows moderate correlation as the time increases. If there is little correlation between stock prices over time, it shows that it is not useful in predicting the future using historical data. So after seeing the result of correlation, we can say that the stock prices of companies in Sensex are not highly related or connected to each other. Then it is proved that there is weak form of efficiency. Because due to the low correlation, values are not increasing significantly but the moderate correlation increases after the time passes.

FINDINGS:
After analyzing the pre recession data of 30 listed BSE Sensex companies through Run Test and Autocorrelation along with using various statistical tools like mean, variance and correlation following finding have been revealed. The study revealed that during period price movements in share prices were random in behavior and were not affected by the past prices. The outcome of the study has proved that during the period weak form of market efficiency or the random walk theory was applicable in the Bombay Stock Exchange During the study period run counts reveled that entire prices were moving in zigzag form The study revealed that during the period due to low correlation, values are not increasing significantly but the moderate correlation increases after the time passes. The study revealed that during the period large number of companies shows moderate correlation as the time increases. It is also been found that historical data are not useful in predicting the future if there is little correlation between stock prices over time. The study revealed that during the period stock prices of companies in Sensex are not highly related or connected to each other during the study period. The study revealed that over the time period increases the correlation between series of past prices decrease.

CONCLUSION:
The present study is an attempt to measure the efficiency of BSE Sensex during pre rescission period. During the study the random walk model says that the previous price changes in return are not very useful in predicting future price or return changes. That is, if we attempt to predict future prices in absolute terms using only historical price-change information, we will not be successful. After applying the statistical like run test and correlation, it can be concluded that the price movement of shares of the companies in BSE SENSEX are random that is nobody can be successful in predicting the future prices on the basis of historical data only. In almost all the companies, run test has rejected (except two companies) the Ho: The price movement in the share prices of BSE is

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not affected by past prices and accepted Ha: The price movement in the share prices of BSE is affected by past prices. Moreover, results of correlation test also support the weak form of efficiency for BSE SENSEX. So, it can be concluded that the price movement of shares on BSE SENSEX are occurring by chance. Before investing in the share of the company listed on Bombay Stock Exchange, an investor should not rely on the historical prices of the share of the company.

SUGGETIONS:
After going through study which is carried out on closing prices of 30 companies framing BSE Sensex we can suggest investors to keep certain fact in their mind before investing in the stocks in the stock market. In general efficient market is been projected and propagated by the market lords but in reality market never be efficient, in fact it always operate in confuse market hypotheses. It will be prudent for the investor to invest not only on the basis of past prices but after making systematic and safe zone if want to reap good returns from the market which requires deep analysis of factor like govt. policy, FIIs investment, inflation and other factors like sound fundamentals, techniques of portfolio management, relevant market information, economic & political factors along with the past prices. They should invest on the basis of fundamentals of the company and may not only consider the capital appreciation, but must sum up the earning through capital appreciation and dividend. Investors must adopt a well-diversified portfolio composed of varying market risk as it will provide risk weighted return. Investors must invest according to their risk taking appetite. Those who seek regular income should prefer stocks which have less variation in return with the occurrence of market and non-market risk and investors who are particular about capital appreciation should prefer such portfolios which have variation in market events and bring multiple changes in expected portfolio return. Investor should not invest on the basis of the information that is publicly available because the informations that are publicly available are not useful every time. It is a core fact that the outcome of any model cannot be true and authentic. It is because the financial data of companys and information which are used to analyze the stock market efficiency are fabricated and window dressed. Mathematical models and statistical tools which are implemented on provided data and information can only produce result of historical data fed by the analyst to establish correlations between numerous factors that could have influenced the price of the stock in the past which cannot be considered authentic. In globalization rules and regulation are framed by the capitalist who suit them the most and are accepted by the nation regulatory bodies following the theme law always slave of rich people. Generally listed stocks have premium weather companies have goodwill and sound track record or not. Company use this amount to buy back the shares owned

by small and knowledge less investors after promoting well planed market panic. The hidden agenda behind such panic become advantage to the remaining share holders as it minimize outside common holdings and profit will be distributed among remaining share holders which by large held with the promoters directly or indirectly. To perform this implicit professional obligation of corruption, rating agencies also play active and supportive role through manipulated rating their listed stocks among the best. Further, investor must be conscious as it is found that in post recession market, diversification will be risky, and generally it reduces only minimum level of market risk. It is a good across highly correlated assets classes as long as they were all moving up and should be done in parts because it is unpredictable to realize how long correlations among markets would last or what else markets might through at investors.

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[16] Punithavathy Padian (2009) Securities analysis and portfolio management [17] Rao (1998), The ICFAI journal of applied finance. [18] Ravi. M. Kishore (2005) 6th Edition, Taxmanns Publications, New Delhi [19] R. M. Srivastava, Divya Nigam (2008) Management of Indian Financial Institutions, Eighth edition, Himalayan Publishing House [20] The ICFAI journal of applied finance April08 [21] Zafar Dr S.M.Tariq (2010) Portfolio Performance in Relation to Risk and Return and Effect of Diversification: A Test of Market Efficiency in India Gitam Journal of Management (Gitam University Vishakhapatanam, ISSNO- 972-740X.

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