23-06-2012, 05:27 PM
EFFICIENCY OF INDIAN STOCK MARKETS: A STUDY OF NSE
INDIAN STOCK MARKETS.docx (Size: 34.22 KB / Downloads: 41)
INTRODUCTION:
The efficient market hypothesis states that asset prices in financial markets should reflect
all available information; as a consequence, prices should always be consistent with
‘fundamentals’. The efficiency of stock market in economic development cannot be
overemphasized. Efficient Stock Markets provide the vehicle for mobilizing savings and
investment resources for developmental purposes. They afford opportunities to investors
to diversify their portfolios across a variety of assets. This has the potential to reduce the
cost of capital through lower risk premiums demanded by supplier of capital. In general,
ideal market is the one in which prices provide accurate signals for resource allocation so
that firms can make productive investment decision and investors can choose among
the securities under the assumption that securities prices at any time fully reflect all
available information. A market in which prices fully reflect all available information is
called efficient.
LITERATURE REVIEW
Fama (1965) propounded his famous efficient market hypothesis for US securities, a
number of empirical research have been carried out to test its validity, mainly in the
developed countries with booming financial markets (Summers, 1986; Fama and French,
1988; Lo and Mackinlay, 1988). Fama classified stock market efficiency into three forms.
They are namely ‘weak form’, ‘semi-strong form’ and ‘strong form’. The classification
depends upon the underlying assumptions relating to information set available to market
participants. Each information set here is more comprehensive than the previous one.
DATA AND METHODOLOGY:
The data set in our study consists of three sub-samples. One sample would include the
daily, weekly and monthly closing prices of S & P CNX Nifty and other indices of NSE for
the period January 1991 to April 2007. Sub-sample 2 would comprise of daily closing
prices of fifty underlying individual companies included S & P CNX Nifty. The time periods
for the second sub-sample vary from stock to stock. Third sample would consist of daily,
weekly, monthly closing prices of NYSE and Chinese Stock Market for the period 1991 to
April 2007. Data set for first two sub-samples are available on www.nseindia.com, CMIE’s
prowess and business beacon data base. Data set for third sub sample will be
obtainable from www.yahoo.com\finance and www.economagic.com. Lo and
Mackinlay (1988) suggest that weekly and monthly data are superior to daily figures since
they are free from sampling problems of biases due to bid-ask spreads, non-trading, etc.
inherent in the daily prices. Chow and Denning (1993) have stressed that the variance
ratio test required a sample size of atleast 256 observations to have reasonable power
against other alternative tools. Under these considerations, the weekly observations are
the most appropriate data for variance ratio test. In-spite of its limitations, the daily
observations would also be included in the study to understand the dynamics.