“Stock Market Prices Follow the Random Walks”

Topics: Stock market, Random walk hypothesis, Financial markets Pages: 13 (4449 words) Published: July 16, 2013
“Stock Market Prices follow the Random Walks”
An evidence of Efficiency of the Karachi Stock Exchange (KSE)

Salman Hashmat
Superior University Lahore
E-mail: salmanhushmat@yahoo.com
Waqas Hameed
Superior University Lahore
Adeel Arshad
M.Phil (Finance Scholar)
Superior University Lahore
E-mail: adi_00782@yahoo.com
Shahid Nasim
M.Phil (Finance Scholar)
Superior University Lahore
E-mail: shahid.nasim208@gmail.com

This study intends to describe the behavior of the Karachi Stock Exchange (KSE)-100 Index regarding the movement of share prices of the companies listed at KSE-100 Index and also studies that share at KSE follow Random Walk and share prices can be predicted or not because almost every investor want to gain abnormal return and outperform the market. To investigate this behavior of the KSE simple unit root tests and cointegration test is used which suggests about the efficiency of the market. Keywords: KSE, Market Efficiency, EMH, Random Walk, Unit Root and Cointegration

The Karachi Stock Exchange was established on September 18, 1947. KSE is the first share market of the Pakistan where almost 70-80% of the trading is taking place now days. The KSE gained the momentum in 1960s in listing the companies and market capitalization. KSE faced lot of challenges regarding the economic and political ups and downs in the country, these fluctuations in the political and economic events put direct effect on the trading activities of the KSE many times in the 60 years of its age. The share prices of the stock market take direct effect of these changes in the political and economic play both positively and negatively sometimes. Some of the markets prove efficient and the others inefficient in responding and adjusting the new information to become prediction free and to reduce the chances of the financial crisis that could be much harmful for the smaller investors as well as the national economy. The market efficiency and inefficiency is under discussion since Eugene Fama evolved the Efficient Market Hypothesis (EMH) in his dissertation of the Ph.D. in 1960s. Eugene Fama published a paper in Financial Analyst Journal in September 1965 “Random Walks in Stock Prices” which was reprinted in January-February 1995, in that paper he defined efficient market(s) as “An efficient market is defined as a market where there are large numbers of rational, profit-maximizers activity competing, with each trying to predict future market values of individual securities and where important current information is almost freely available to all participants. In an efficient market, competing among the many intelligent participants leads to a situation where at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual prices of a security will be a good estimate of its intrinsic value” The efficiency of the market is very necessary because if a market is inefficient in adjusting the new information then the profit-maximizers can outperform the market by knowing the undervalued or overvalued securities and can gain abnormal returns and on the other hand inefficiency of the stock market cause a lot harm to the small investors as well as the whole economic system of a country. On the basis of the information adjustment and availability of this information to the participants in the trading activities of the stock market, the efficiency of the stock market can be classified into three levels explained one by one as follows

Strong-Form of Efficient Market
In this form of efficient market all the relevant information both public and historical is reflected in the share prices being traded in such markets and no one can beat the market. Semi-Strong Form of...

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