Efficient market hypothesis and Indian stock market

Abstract

This paper makes a serious attempt to understand whether there exists a case of market efficiency in Indian capital market as understood by efficient market hypothesis. It starts by discussing how various authors are challenging the efficient marker hypothesis. In order to confirm whether the efficient market hypothesis is applicable to the Indian Stock Market, the study has used the NSE NIFTY returns for the last decade and tested them for normality. While analyzing the CNX NIFTY returns data for the period from July l990 to October 2002 it was found that the tails were a bit fatter, and more significantly the peak around the mean was higher than predicted by the normal distribution. The most common explanation of the fat tails is that information shows up in infrequent clumps, rather than in a smooth and continuous fashion. Incidence of three and four sigma event have also been observed. The daily returns are positively skewed for NIFTY and contain a large frequency o f returns around the mean. Finally, two important tests have been performed using these data: the Variance ratio test and the Rescaled Range (R/S) Analysis to test for persistence in the NIFTY daily returns.