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Efficient Market Hypothesis: Examining the Case of South Asian Stock Markets

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Efficient Market Hypothesis: Examining the Case of South Asian Stock Markets

Sharon Prakash

Abstract This study examines the relevance of the Efficient Market Hypothesis among emerging stock markets belonging to the South Asian Association for Regional Cooperation (India, Pakistan, Sri Lanka and Bangladesh) and the Global economy. The study employs daily closing prices of eminent market indices from a time period 2004-2013.The stock returns have been subjected to unit root tests such as the Augmented Dickey Fuller test and a panel unit root test. Additionally the existence of random walk for these stock markets has also been examined through the Jarque-Bera statistic. The results indicate information inefficiency in the time period under study for all indices. Investors can therefore predict future prices on the basis of historical information, and receive excessive returns. The results have implications for developing economies wherein the government has to ensure that all asset related information be made public, to curb state interference.

Introduction The concept of Efficient Market Hypothesis (EMH) holds special importance in the field of Finance, especially Capital markets. This hypothesis postulates that markets are informationally efficient. This asserts that the price of any security will fully reflect all the information that is available to the investors. That being said, one cannot consistently achieve returns that are excess of the average market returns on a risk-adjusted basis, with information available at the time of investment. First developed separately by Eugene F. Fama and Paul A. Samuelson, the concept assumes that the investors need not be rational. In an efficient market, investors may either overreact or under react to newly available information. The investor’s reactions are random, such that the price changes are random as well.…...

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