This study investigates the weak form efficiency in the Indian equity futures market. For this purpose, the informational efficiency of the Nifty futures and 24 stock futures is examined. The Nifty and stock futures returns are found to be deviating from normal distribution. The futures prices are found to be nonstationary at levels, whereas first difference futures returns are stationary. Empirical analysis finds evidence of statistical dependence in the returns generating process. Further analysis through the Autoregressive Integrated Moving Average (ARIMA) process reveals that the Nifty and stock futures returns are not independent and shows strong dependencies.
The professional stock market analysts and the academic statisticians hold contradictory view
on the price behavior in speculative markets. The professional analysts believe that there exists
certain trend generating facts, knowable today, which guides a speculator to earn supernormal
profit, provided he is able to read them correctly and timely. These facts are believed to
generate trends rather than instantaneous jumps, because most of the traders in the speculative
markets have imperfect knowledge of these facts, and the future trend of prices will result from
a gradual spread of awareness of these facts throughout the market. Those who read
information earlier than others will have an opportunity to secure supernormal profits.
Two main schools of professional analysts— the ‘fundamentalists’ and the ‘technicians’— agree
on this basic assumption. The only difference lies in the methodology to read the information
early (Alexander, 1961).
The ‘fundamentalists’ seek early knowledge by studying the external factors that cause the
price changes. In a commodity market, they try to forecast the prospective demand-supply
equilibrium, whereas in the stock market, they study general business conditions and the
prospective earning profile for various industries and individual firms within those industries,
with special attention to new developments. |
