A Study Of Weak Form Efficiency Of Bombay Stock Exchange Sectoral Indices

Abstract

Efficiency of equity markets has important implications for the investment policy of the investors. In an efficient market, prices of the assets will reflect market’s best estimate for the risk and expected return of the asset, taking into account what is known about the asset at the time. However, if the markets were not efficient, an investor will be better off trying to spot winners and losers in the market and correct identification of miss-priced assets will enhance the overall performance of the portfolio. This paper tests the weak form efficiency and randomness of the sectoral indices of Bombay Stock Exchange in India. It was found that there is no random distribution in the returns of BSE sectoral indices. The Runs test of efficiency at the weak level showed that all the sectoral indices return in BSE are not random over the time period of the study. Also, the indices return display predictable (nonrandom walk)behavior. Thus, the runs tests conclude that the BSE sectoral indices at the weak-form is inefficient, which means that all current information is not reflected in stock prices and past data.