Weak-Form Efficiency in Bombay Stock Exchange

ABSTRACT

This pragmatic paper tests out the weak form efficiency of Bombay Stock Exchange by
observing the daily, weekly and monthly data over the period of January 2000 to December
2012, based on the techniques of i) VAR (for Lag Selection), ii) Unit Root Test, iii)
Kolmogorov Srinov Test and iv) Run Test. Unit Root Test shows that the returns are non-
stationary and BSE is not weak-form efficient. Lag decides on the basis of S.C value, KS and
Run Test indices that daily and weekly data of BSE is not weak-form efficient but monthly
data results that weak-form efficiency does exist in long run.

KEYWORDS: Weak-form Efficiency of BSE. VAR (Lag Selection), Unit Root(Adf,PP),

KS, Run.
Weak-Form Efficiency in Bombay Stock Exchange

INTRODUCTION

The Bombay Stock Exchange (BSE) called Bombay Share Bazaar (formerly called The Stock
Exchange, Bombay) is a stock exchange located on Dalal Street, Mumbai and is oldest stock
exchange in Asia. The equity market capitalization of the companies listed on the BSE
was US$1 trillion as of December 2011, making it the 6th largest stock exchange in Asia and
the 14th largest in the world. The BSE has the largest number of listed companies in the
world. As of March 2012, there are over 5,133 listed Indian companies and over 8,196 scrip
son the stock exchange that shows the Bombay Stock Exchange has a significant trading
volume. The BSE SENSEX, also called "BSE 30", is a widely used market index in India
and Asia.
Weak-Form Efficiency in Bombay Stock Exchange

LITRATURE REVIEW:

Mustafa (2004) examines the United Arab Emirates (UAE) stock prices behavior, stock
market using daily prices of 43 stocks included in the UAE market index for the period
October 2, 2001 to September 1, 2003. It is found that the returns of the 43 stocks do not
follow normal distribution. However, the results of run tests show that the returns of 40
stocks out of the 43 are random at 5% level of significance. Being a newly established
market, the UAE stock market, according to this study is found to be weak-form efficient.
Pandey (2003) analyzed the efficiency of the Indian stock markets by using three Indian
stock indices to test the efficiency level in Indian stock market and the random walk nature of
the stock market by using the runs test and the Auto Correlation Function ACF (K) for the
period from January 1996 to June 2002. The study finds that the series of stock indices in the
Indian stock market biased the random time series and do not confirming the Random Walk
Theory.
Tas et. at. (2005) have confirmed the inefficiency results for Turkey stock using daily stock
returns of ISE 30indices from the period 1995 to 2004. Dickey-Fuller unit root and run tests
were used in their studies and the results of both tests reject random walk hypothesis in ISE.
Alamet. al. examined the weak-form efficiency in Dhaka stock market. Data was taken from
1994 to 2005.This study used both parametric and non-parametrictests. Non parametric tests
(Kolmogrov-Smirnov and Run Test), parametrictests (Auto Regression and Auto Correlation)
were used. This computational analysis findsevidence of weak form of efficiency in Dhaka
stock market.
Haqueet.al. (2011) examined the tests out of the weak-form efficiency of Pakistani stock
market byexamining the weekly 100 KSE index over the period 2000 -2010. Go-Back series
has a leptokurtic and unconstructively twisted allocation, which is away from regular
allocation as reflected by considerable Jarque-Bera statistic. Expected results of ADF (1979),
PP (1988) and KPSS (1992) tests, Ljung-Box Q-Statistic of autocorrelations and runs test of
chance eliminate the Random Walk Hypothesis (RWH) for the returns series. Besides the
results of variance ratio test, Lo and MacKinlay (1988)also reject the RWH and prove the
strength of other anticipated results. The elimination of RWH reveals that the Pakistani stock
prices are not weak-form efficient. It was concluded the weak-form efficient hypothesis does
not hold true in the case of Pakistani stock market. Thus the existing stock prices are useful in
predicting the future prices.
Weak-Form Efficiency in Bombay Stock Exchange

Liu(Jan2003)examined the weak-form efficient market hypothesis in ShanghaiStock

Exchange using the data from April, 1996 to April, 2002. A set of tests based onthe CAPM
and another set of tests on the trading strategies are used. Twotests of the CAPM on two
methodologies, which are a beginning test and theFama-MacBethregressions are suggested.
Overall, the results do not bear the weak-form efficient market hypothesis in Shanghai Stock
Exchange during the inspection of the CAPM and the serialcorrelations using the data from
April, 1996 to April, 2002.The major suggestions of this study can be pointed out as
follows:i) Thepredictive capacity is attractive for investors to hit the market using the
contrarianstrategies. ii) This study provides the serial correlation patterns of a lessdeveloped
market.
Hammad et.al.In this paper an effort has been made to form the unpredictability of stock
returns and to test for weak-form efficiency for the Pakistani stock market, using daily
closing prices from December 1998 to March 2006. It is pointed out that returns show
determination and unpredictability clustering. Weak-form efficiency hypothesis is rejected as
it is found that past information helps in predicting upcoming prices.In this paper a
comprehensive GARCH (p,q) model is utilized to model unpredictability and test for weak-
form efficiency of the stock returns.There exists a huge literature on modeling and estimating
totalstock marketunpredictability in excess of the past decade. In this paper an effort ismade
to form the unpredictability of stock returns for the Pakistani stock market and to test for
weak-form efficiency. The outcome indicates that returns show determination and volatility
clustering. Weak-form efficiency hypothesis is discarded as it is found that past information
helps in predicting upcoming prices.
Higgs et.al.tests for chance walks and weak-form market efficiency in European equity
markets. Daily returns for sixteen industrial markets (Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom) and four rising markets (Czech Republic, Hungary,
Poland and Russia) are observed for chance walks using a mixture of serial correlation
coefficient and runs tests, Augmented Dickey-Fuller (ADF), Phillips-Perron (PP) and
Kwiatkowski, Phillips, Schmidt and Shin (KPSS) unit root tests and multiple variance ratio
(MVR) tests. This examination yields with anoverview that rising markets are not likely to be
connected with the chance walks essential for the hypothesis of weak-form market efficiency.
Hanif et.al.(2012)has examined the weak-form of efficient market hypothesis on the four
major stock exchanges of South Asiaincluding, India, Pakistan, Bangladesh and Sri
Weak-Form Efficiency in Bombay Stock Exchange

Lanka.Historical index values on a monthly, weekly and dailybasis for a period of 14 Years
(1997-2011) were used for analysis. Four statistical tests including RunsTest, Serial
Correlation, Unit Root and Variance Ratio Test. It is recommended that none of the four
major stockmarkets of south-Asia follows Random-walk and hence all these markets are not
the weak form of efficient market.
Aysha et.al.(2011)examines the weak-shape informational efficiency of banking sector in
rising markets of Pakistan. The data from June, 1997 to April 15, 2009 was used from eleven
high volume trading banks listed on Karachi Stock Exchange. The numerical techniques used
contain Augmented Dickey Fuller and Phillips-Perron tests in classify to make sure
stationary, as Cointegration and VAR tests are apply to inspect the weak form efficiency. The
outcome refuted the null hypothesis of weak form Efficient Market Hypothesis in banking
sector. Additionally the prices show expected and functional patterns final inefficiency of
banking division for KSE

Akaash et.al.(2010).This experimental study is conducted to test the weak-form market

efficiency of the
Stock market returns of Pakistan, India, Sri Lanka, China, Korea, Hong Kong, Indonesia,
Malaysia, Philippine, Singapore, Thailand, Taiwan, Japan and Australia. Monthly
observations are in use for the period January 2004 to December 2009. Autocorrelation,
Ljung-Box Q-statistic Test, Runs Test, Unit Root Test and the Variance Ratio are used to test
the hypothesis that the stock market follows a random walk. Monthly returns are not usually
spread, as they are negatively skewed and leptokurtic. In collective we completed that the
monthly prices do not follows random walks in all the countries of the Asian-Pacific region.
The investors can takethe stream of profit through arbitrage procedure from beneficial
opportunities across these markets.
Rehman(2012)theweak-form of efficiency of Emerging South AsianStock Markets is
examined i.e. Karachi Stock Exchange (KSE) of Pakistan, Bombay Stock Exchange(BSE) of
India and Colombo Stock Exchange (CSE) of Sri Lanka. Using 13 years dailydata of closing
indices of these stock exchanges form the period of 1st July 1998 to 10thMay 2011. We apply
the Autocorrelation, Q-Statistics, Unit Root and the Descriptiveanalysis to examine the
efficient markets, while CSE is the weak form efficient market.In this article we have
empirically tested the weak form of market efficiency of the rising South Asian stock markets
that is Karachi Stock Exchange (KSE) of Pakistan, Bombay Stock Market (BSE) of India and
Weak-Form Efficiency in Bombay Stock Exchange

Colombo Stock Market (CSE) for Sri Lanka. The data sample of daily closing index of these
stock markets gathered from 1st July to 10th May 2011. The outcome specifies that Pakistani
and Indian equity markets are ineffective markets means not weak form efficient and these
markets returns. although the Colombo Stock market is weak form efficient and reply directly
to all publicly presented information relatively than past prices.
Joseph Magnus (2008) studies the weak-form efficient market hypothesis (EMH) in the
caseof the Ghana Stock Exchange (GSE) a upward market. Daily returns from the Databank
Stock Index (DSI) over a 5-year period 1999-2004 were used for the tool. Random walk
(RW) and GARCH(1,1) models are used as the basis for our analysis. The GSE DSI returns
series show instability clustering, an sign of ineffectiveness on the GSE. The weak-form
efficient market (random walk) hypothesis was rejected for the GSE, meaning that the market
is ineffective. Our findings in this study show that the Ghana Stock Exchange is weakly
inefficient. The conclusion from the RW and GARCH models generally reject the presence of
random walks in the DSI daily market returns
Keaseyseeks proof behind the reality of at least weak-form efficiency of themarket. The
model includes the daily price index of all the listed confidences on the DSE for theperiod of
1988 to 1997. The theory of the study is whether the Dhaka Stock Market is weak-
formcompetent. The outcome of mutually non-parametric (Kolmogrov Smirnov normality
test and runtest) test and parametric test ( Auto-correlation test, Auto-regression, ARIMA
model ) giveproof that the share return series do not follow random walk model and the major
autocorrelationco-efficient at unusual lags refuse the null hypothesis of weak-form efficiency.
Theconsequences are constant in dissimilar sub-sample observations, without outlier and for
individualsecurities.
Bahadurobserves theweak shape market value of Nepalese stock market byusing 1970 daily
observations from 2003 to 2009 of the common NEPSE index andseven unusual sector-wise
index. The study employs five different tests of unsystematicwalk: autocorrelation test, runs
test, unit root tests (ADF, PP, and KPSS), varianceratio test and autoregressive conditional
heteroskedasticity test. The outcome of the testsis in wide agreement, categorically rejecting
the existence of random walk in dailyreturns of the eight stock market index.
Wickremasinghe examines weak shape effectiveness in the stock markets of India, Sri
Lanka, Pakistan and Bangladesh; and the linkages between these four markets. The increased
Dicky Fuller (ADF-1979), the Phillip-Perron (PP-1988), the Dicky-Fuller comprehensive
Least Square (DF-GLS 1996) and Elliot-Rothenber-Stock (ERS 1996) tests are used to
Weak-Form Efficiency in Bombay Stock Exchange

inspect stock market efficiency. The outcome of this study, The famous affairs can be used
by local and international investors to predict the movements of stock markets in order to
invest in profitable stock markets.
Weak-Form Efficiency in Bombay Stock Exchange

DATA & METHODOLOGY

DATA

Where Daily, Weekly and monthly closing prices of Bombay stock exchange indices over the
period of January 2000 to December 2012. Daily, weekly and monthly returns are calculated
using following formula.

Return = Lr = ln(Ct / Ct- 1),

Ln = Natural Log

Lr = Return for Given Period t;

Ct = Price at closing time

Ct-1 = Price at the opening time

METHADOLOGY:

Monthly, weekly and daily stock price of Bombay stock exchange is used from 2000 to 2012.
For data analysis following techniques are used: VAR (For lag selection), Unit Root Test,
Kolmogrov Srinov Test and Run Test.
Weak-Form Efficiency in Bombay Stock Exchange

VAR(daily data)

Lag LogL LR FPE AIC SC HQ

0 -2973.2 NA 0.435912 2.007561 2.009584 2.008289

1 7868.086 21667.94 0.000289 -5.30954 -5.3055 -5.30809
2 7877.033 17.87619 0.000288 -5.31491 -5.308837* -5.31272
3 7879.462 4.850719 0.000288 -5.31587 -5.30778 -5.312958*
4 7879.543 0.160857 0.000288 -5.31525 -5.30514 -5.31161
5 7880.018 0.948197 0.000288 -5.3149 -5.30276 -5.31053
6 7882.12 4.195322 0.000288 -5.31564 -5.30148 -5.31054
7 7884.287 4.322138* 0.000287* -5.316427* -5.30024 -5.3106
8 7884.963 1.347735 0.000288 -5.31621 -5.298 -5.30966

Note: For lag selection VAR test is applied and SC value is minimum at 2 lag. So lag
decision is made on the basis of S.C value.

Unit Root Test (Daily)

ADF Level ADF First Diff PP Level PP First Diff.

Daily -0.53865 -31.7168 -0.53685 -50.5815

Critical Values
1% -3.43236 -3.43236 -3.43236 -3.43236
5% -2.86232 -2.86232 -2.86231 -2.86232
10% -2.56723 -2.56723 -2.56723 -2.56723

Note: Results of unit root test shows that daily returns are non-stationary at level and
becoming stationary after first differencing. These results show that Bombay stock market is
not weak form efficient in case of daily data.
Weak-Form Efficiency in Bombay Stock Exchange

VAR (Weekly)

Lag LogL LR FPE AIC SC HQ

0 -624.307 NA 0.437252 2.010632 2.017759 2.013402

1 1183.033 3603.057 0.001313 -3.79753 -3.783281* -3.792
2 1183.36 0.65023 0.001316 -3.79537 -3.77399 -3.78706
3 1187.72 8.664416* 0.001302* -3.806174* -3.77767 -3.795095*
4 1187.875 0.307064 0.001305 -3.80346 -3.76782 -3.78961

Note: Above table shows that SC value is minimum at one month lag. So, One month is
proper lag length.

Unit Root Test (Weekly)

ADF Level ADF First Diff PP Level PP First Diff.

Weekly -0.49757 -15.4028 -0.4889 -24.1535

Critical Values
1% -3.4406 -3.44062 -3.44058 -3.4406
5% -2.86595 -2.86596 -2.86595 -2.86595
10% -2.56918 -2.56918 -2.56918 -2.56918

Note: In case of weekly data, it results also supported the previous results that Bombay stock
market is not weak form efficient. Data was non stationary at levels but becomes stationary.
Weak-Form Efficiency in Bombay Stock Exchange

VAR (Monthly)

Lag LogL LR FPE AIC SC HQ

0 -133.212 NA 0.447373 2.033513 2.055353 2.042388

1 152.1765 562.1287* 0.006016 -2.2754 -2.231723* -2.257653*
2 153.263 2.123565 0.006008* -2.276712* -2.21119 -2.25009
3 153.2832 0.039081 0.006098 -2.26187 -2.17451 -2.22637
4 153.759 0.915725 0.006147 -2.25393 -2.14473 -2.20955
5 154.4934 1.401896 0.006172 -2.2499 -2.11886 -2.19665
6 154.8711 0.715423 0.006231 -2.24047 -2.0876 -2.17835
7 154.9149 0.082248 0.006322 -2.22598 -2.05127 -2.15499
8 154.9569 0.078197 0.006415 -2.21147 -2.01491 -2.1316
9 155.4683 0.945436 0.006463 -2.20407 -1.98567 -2.11532
10 156.0008 0.976279 0.00651 -2.19698 -1.95675 -2.09936
11 156.0673 0.120867 0.006603 -2.18284 -1.92077 -2.07634
12 156.2603 0.347993 0.006685 -2.17061 -1.8867 -2.05524

Note: Results of VAR indicate that one month is proper lag length and decision is made on
the basis of minimum lag length selection.

Unit Root Test (Monthly)

ADF Level ADF First Diff PP Level PP First Diff.

Monthly -0.58767 -7.60653 -0.56122 -10.623

Critical Values
1% -3.47681 -3.47714 -3.47647 -3.47681
5% -2.88183 -2.88198 -2.88169 -2.88183
10% -2.57767 -2.57775 -2.57759 -2.57767

Note: In case of monthly data, results showed that Bombay stock market is not weak form
efficient.
Weak-Form Efficiency in Bombay Stock Exchange

Tests of Normality

Daily Data

Descriptives
Statistic Std. Error
V Mean 0.000356 0.000313
Lower
95% Confidence Interval for Mean Bound -0.00026
Upper
Bound 0.000968
5% Trimmed Mean 0.000611
Median 0.001107
Variance 0.00029
Std. Deviation 0.017031
Minimum -0.11809
Maximum 0.1599
Range 0.277992
Interquartile Range 0.017224
Skewness -0.17757 0.044924
Kurtosis 5.990053 0.089818

Note: Descriptive results of Bombay stock market according to daily data is the value of
mean is 0.000356 and the value of std.deviation is 0.017031.

Kolmogorov-Smirnov(a) Shapiro-Wilk
Statistic df Sig. Statistic df Sig.
v 0.065515 2970 1.83E-33 0.946506 2970 1.43E-31
a Lilliefors Significance Correction

Note: KS test shows the results of the significance value is 1.43E-31 which shows that
bombay stock market is not weak form efficient.
Weak-Form Efficiency in Bombay Stock Exchange

Weekly Data

Descriptive
Statistic Std. Error
V Mean 0.001678 0.001443
95% Confidence Interval for Mean Lower Bound -0.00116
Upper Bound 0.004512
5% Trimmed Mean 0.0026
Median 0.005063
Variance 0.001302
Std. Deviation 0.03608
Minimum -0.17381
Maximum 0.131709
Range 0.305517
Interquartile Range 0.041483
Skewness -0.53735 0.097746
Kurtosis 2.335976 0.195183

Note: The value of mean is0.001678 and the value of std.deviation is 0.03608.
Weak-Form Efficiency in Bombay Stock Exchange

Kolmogorov-Smirnov(a) Shapiro-Wilk
Statistic df Sig. Statistic df Sig.
V 0.064474 625 1.76E-06 0.966055 625 7.69E-11
A Lilliefors Significance Correction

Note: KS test shows the results significance value is 7.69-11 which shows that bombay stock
market is not weak form efficient.
Weak-Form Efficiency in Bombay Stock Exchange

Monthly Data

Descriptive
Statistic Std. Error
v Mean 0.00761 0.006425
Lower
95% Confidence Interval for Mean Bound -0.00509
Upper
Bound 0.020311
5% Trimmed Mean 0.009781
Median 0.010305
Variance 0.005903
Std. Deviation 0.076831
Minimum -0.27299
Maximum 0.248851
Range 0.521843
Interquartile Range 0.098378
Skewness -0.45876 0.202731
Kurtosis 1.044181 0.402792

Note: The value of mean is 0.00761 and the value of std.deviation is 0.076831.

Kolmogorov-Smirnov(a) Shapiro-Wilk
Statistic df Sig. Statistic df Sig.
V 0.072169 143 0.065488 0.979975 143 0.034348
A Lilliefors Significance Correction

Note: KS result shows the value of significance is 0.034348 which proves that Bombay stock
market is weak form efficient for long run.
Weak-Form Efficiency in Bombay Stock Exchange

Run Test (Daily)

v
Test Value(a) 0.001107
Cases < Test Value 1485
Cases >= Test Value 1485
Total Cases 2970
Number of Runs 1390
Z -3.52368
Asymp. Sig. (2-tailed) 0.000426
A Median
Runs Test 2
v
Test Value(a) 0.000356
Cases < Test Value 1416
Cases >= Test Value 1554
Total Cases 2970
Number of Runs 1374
Z -4.00192
Asymp. Sig. (2-tailed) 6.28E-05
A Mean

Note: The Run Test shows the result that Bombay stock market is not weak form efficient
according to the daily data
Weak-Form Efficiency in Bombay Stock Exchange

Run Test (Weekly)

v
Test Value(a) 0.005063
Cases < Test Value 312
Cases >= Test Value 313
Total Cases 625
Number of Runs 284
Z -2.36184
Asymp. Sig. (2-tailed) 0.018185
A Median
v
Test Value(a) 0.001678
Cases < Test Value 283
Cases >= Test Value 342
Total Cases 625
Number of Runs 286
Z -1.99662
Asymp. Sig. (2-tailed) 0.045866
A Mean

Note: Run Test shows the results that Bombay stock market is not weak form efficient
according to Weekly data.
Weak-Form Efficiency in Bombay Stock Exchange

Run Test (Monthly)

Runs Test 1
v
Test Value(a) 0.010305
Cases < Test Value 71
Cases >= Test Value 72
Total Cases 143
Number of Runs 76
Z 0.588057
Asymp. Sig. (2-tailed) 0.556494
A Median

Runs Test 2
v
Test Value(a) 0.00761
Cases < Test Value 69
Cases >= Test Value 74
Total Cases 143
Number of Runs 78
Z 0.93895
Asymp. Sig. (2-tailed) 0.347757
A Mean

Note: Run Test shows the results that Bombay stock market is weak form efficient according
to monthly data; it shows that Bombay stock market is not weak form efficient in short term
but it is efficient in long run.
Weak-Form Efficiency in Bombay Stock Exchange

CONCLUSION:

Market efficiency states that security prices reflect all available information. Market
Efficiency states that there exists three form of it. In this study weak form of market
efficiency is tested using run test, KS test and unit root tests. Daily, weekly and monthly data
was used. Results showed that Bombay stock market is not weak form efficient in case of
daily and weekly datahowever; it showed the evidence of weak form efficiency in case of
monthly data. These results state that market if no efficient in short run but it becomes
efficient in case of long run.
Weak-Form Efficiency in Bombay Stock Exchange

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