Testing the Weak Form of Efficiency of Karachi Stock Exchange

Pak. J. Commer. Soc. Sci. 2012 Vol. 6 (2), 297-307

Testing the Weak Form Efficiency of Karachi Stock Exchange
Muhammad Arshad Haroon Assistant Professor of Commerce, Government Sindh College of Commerce and Post, Graduate Center, Hyderabad, Adjunct Assistant Professor of Commerce, Isra University, Hala Nakka, Hyderabad, Pakistan E-mail: [e-mail] Abstract In an efficient market, share prices reflect all available information. The study of efficient market hypothesis helps to take right decisions related to investments. In this research, weak form efficiency has been tested of Karachi Stock Exchange—KSE covering the period of 2nd November 1991 to 2nd November 2011. Descriptive statistics indicated the absence of weak form efficiency while results of non-parametric tests, showed consistency as well. We employed non-parametric tests were KS Goodness-of-Fit test, run test and autocorrelation test to find out serial independency of the data. Results prove that KSE is not weak-form-efficient. This happens because KSE is an emerging market and there, it has been observed that information take time to be processed. Thus it can be said that technical analysis may be applied to gain abnormal returns. Keywords: Weak form efficiency, KSE, Random walk theory. 1. Introduction Stock markets are considered as a barometer of the economy Dholakia (2009); because stock markets facilitate investment related activities. For this reason there can be seen great interest on stock return processes and investors continuously work to find out the ways that will turn in handsome return. There is wide amount of literature on market efficiency and great debate over financial management and therefore, on market efficiency to cope up with financing and investing in stock markets. The notion of efficiency in stock market helps to understand the working mechanism of capital markets and taking right decision related to investment. Basically market efficiency is used to show the

References: Akbar, M and Baig, H.H. (2010). Reaction of Stock Prices to Dividend Announcements and Market Efficiency in Pakistan. Lahore Journal of Economics, 15 (1), 103-125. Al-Jafari, M.K. (2011). Testing the Weak-Form Efficiency of Bahrain Securities Market. International Research Journal of Finance and Economics, Issue 72, 14-24. 305 Testing the Weak Form Efficiency of KSE Al-Jarrah, M.I., Khamees, B.A. and Qteishat, I.H. (2011). The "Turn of the Month Anomaly" in Amman Stock Exchange: Evidence and Implications. Journal of Money, Investment and Banking, Issue 21, 5-11. Ansari, (2011). Testing Weak Form Stock Market Efficiency on Bombay Stock Exchange of India Tenth International Conference on Operations and Quantitative Management. Awad, I. and Daraghma, Z. (2009). Testing the Weak-Form Efficiency of the Palestinian Securities Market. International Research Journal of Finance and Economics, Issue 32, 7-17. Bashir, T., Ilyas, M. and Furrukh, A. (2011). Testing the Weak-Form Efficiency of Pakistani Stock Markets-An Empirical Study in Banking Sector. European Journal of Economics, Finance and Administrative Sciences, Issue 31, 160-175. Davis, Mark and Etheridge, Alison, (2006). Louis Bachelier 's Theory of Speculation: The Origins of Modern Finance, New Jersey: Princeton University Press, Dholakia. (2009). Stock Market: The Barometer of Economy 's Health. Stock markets, BlogSpot Fama E. (1965). The Behavior of Stock-Market Prices. The Journal of Business, 38(1), 34-105. Gersdorff, N. von, and Bacon, F. (2009). U.S. Mergers and acquisitions: a test of market efficiency. Journal of Finance and Accountancy, 1(8), 1-8. Hamid, K., Suleman, M.T., Shah, S.Z.A. and Akash, R.S.I. (2010). Testing the Weak Form of Efficient Market Hypothesis: Empirical Evidence from Asia-Pacific Markets. International Research Journal of Finance and Economics, Issue 58, 121-133. Haque, A. Liu, H-C and Fakhar-Un-Nisaet. (2011). Testing the Weak Form Efficiency of Pakistani Stock Market-2000 to 2010. International Journal of Economics and Finance, 1(4), 153-162. Hassan, K.M. Al-Sultan, W.S. and Al-Saleem, J.A. (2003). Stock Market Efficiency in the Gulf Cooperation Council Countries (GCC): The Case of Kuwait Stock Exchange. Scientific Journal of Administrative Development, 1(1). 1-21. Worthington, A.C. and Higgs, H. (2003). Weak-form Market Efficiency in European Emerging and Developed Stock Markets. School of Economics and Finance Discussion Papers and Working Papers Series 159, School of Economics and Finance, Queensland University of Technology, Brisbane, Australia. Hudson, R., Dempsey, M. and Keasey, K. (1996). A Note on the Weak Form Efficiency of Capital Markets: An Application of Simple Technical Trading Rules to UK Stock Prices– 1935 to 1994. Journal of banking and finance, 20(6), 1121-1132. Khan, A.Q., Sana, I. and Mehtab, M. (2011). Testing Weak Form Market Efficiency of Indian Capital Market : A case of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). African Journal of Marketing Management, 3(6), 115-127. Levin J, and Fox A.J. (1994), “Elementary Statistics in Social Research (6th edition). New York: Harper Collins College Publishers. 306 Haroon Mabhunu, M. (2004). The Market Efficiency Hypothesis and the Behavior of Stock Returns on the JSE Securities Exchange. Master Thesis, Rhodes University, South Africa. Mishra, (2011). Weak Form Market Efficiency: Evidence from Emerging and Developed World. The Journal of Commerce, 3(2). 2220-6043. Mobarek, (2000). Weak-form Market Efficiency of an Emerging Market: Evidence from Dhaka Stock Market of Bangladesh. ENBS Conference held on Oslo Oskooe, S.A.P., Li, H. and Shamsavari, A. (2010). The Random Walk Hypothesis in Emerging Stock Market. International Research Journal of Finance and Economics, Issue 50, 51-61. Poshakwale, (1996). Evidence on Weak Form Efficiency and Day of the Week Effect in the Indian Stock Market. Finance India, 10(3), 605-616. Raihan, and Anwar U. (2007). Chittagong Stock Market of Bangladesh: Turning of a Weak-Form Market into an Efficient Market. SAAC Journal of Human Resource Development, 3, 26-45 Raja, M. Sudhahar, J,C. and Selvam, M. (2009). Testing the Semi-Strong form Efficiency of Indian Stock Market with Respect to Information Content of Stock Split Announcement – A Study in IT Industry. International Research Journal of Finance and Economics, Issue 25. 7-20. Rashid, A. and Fazal, H. (2009). Testing the Weak Form Efficiency in Pakistan’s Equity, Badla and Money Markets. MPRA Paper 22285, University Library of Munich, Germany. Seiler, M.J. and Rom, W. (1997). Historical Analysis of Market Efficiency: Do Historical Returns Follow a Random WALK?. Journal of Financial and Strategic Decisions, 10 (2), 49-57. Chau, M. and Vayanos, D. (2005). Strong-form efficiency with monopolistic insiders. CEPR, London School of Economics and Political Science, London, UK. [Online] Available: http://eprints.lse.ac.uk/458/ Debysingh, N. and Watson, P.K. (2007). Automation & Efficiency in Two Emerging Equity Markets. CCMS 39th Annual Monetary Studies Conference Weiss, A.N. (1999). Introductory Statistics (5th edition). Boston: Addison-Wesley Publishing Company. Zar, H.J. (1996). Bio Statistical Analysis (3rd edition). New Jersey: Prentice Hall Inc. 307