Tests of Random Walk in Indian Stock Market Returns- An Application of Variance Ratio Test

Abstract

The primary objective of the study is to test the random walk hypothesis (RWH)for Indian stock returns. The daily closing prices of 24 firms of BSE 500 were collected for the period of 10 years ranging from 1st January 2003 to 31" December 2012, which were selected based on Multi-Stage Non-Random Sampling Technique. The study used normality test, stationarity test and the variance ratio (VR)test for the hypothesis that the stock market (SM) returns follow a random walk. Overall, the study found that the RWH is rejected for all the firms implying that there exists a non-random behaviour of returns and the Indian SM does not show the characteristics of random walk which means that the mean reverting tendencies of return series exists in both long-run as well as in the short-run period.