The present study investigates the weak-form efficiency of Indian stock markets using both parametric and nonparametric tests, viz., autocorrelation test, augmented Dickey-Fuller test, runs test and variance ratio test. To test the market efficiency, the study considers the daily closing prices of 13 and 10 sectoral indices of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), respectively, along with the BSE SENSEX and CNX NIFTY. The empirical results provide evidences for the absence of the weak-form efficiency and random walk hypothesis in the case of all sectoral indices of NSE and BSE along with the CNX NIFTY and BSE SENSEX. Thus, trading strategies can be formulated by investors to gain abnormal returns in the Indian stock markets. And it can be inferred that there is a possibility of earning extra income on account of inefficiency in these market portfolios.

The term market efficiency in capital market theory is used to explain the degree to which stock prices reflect all available, relevant information. The concept of Efficient Market Hypothesis (EMH) is based on the arguments put forward by Samuelson (1965) that anticipated the price of an asset to fluctuate randomly. In finance, EMH asserts that financial markets are informationally efficient, i.e., one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made. According to Fama (1970), there are three major versions of the hypothesis, viz., weak-form, semi-strong, and strong-form. Weak EMH claims that prices on traded assets (e.g., stocks, bonds or property) already reflect all past publicly available information. Semi-strong EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. Strong EMH additionally claims that prices instantly reflect even hidden or ‘insider’ information. There is evidence for and against the weak and semi-strong EMH, while there is powerful evidence against strong EMH.

Random walk hypothesis basically measures weak-form of market efficiency. In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no ‘patterns’ to asset prices. This implies that future price movements are determined entirely by information not contained in the price series. Hence, prices must follow a random walk. However, if the markets were not efficient, the investors would beat the market and attain maximum profits. Participants in an inefficient market can use various devices such as trading rules and statistical techniques to predict the movement of stock prices.

Financial Risk Management Journal, Indian Stock Markets, Weak-Form Efficient, Bombay Stock Exchange (BSE), BSE SENSEX, CNX NIFTY., ational Stock Exchange (NSE), Sectoral Indices.