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Structural Changes in India's Stock Markets' Efficiency

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  • Sasidharan, Anand
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    Abstract

    This paper finds evidence that the Indian stock market has become weak-form efficient, off-late. We proceed by, first, locating structural breaks in the index using Bai-Perron's method for endogenous multiple structural changes. Four structural breaks are identified for the period 1991 to 2008 for the S&P CNX Nifty series -- December 1994, July 1999, June 2003 and January 2006. For this period the behaviour of returns approximates a Stable Paretian distribution. This would mean that the market risk will be beyond that can be predicted by measures build on the assumption of normality of returns. The property of infinite population variance of a stable paretian distribution makes variance based estimators redundant. Therefore, using non-parametric methods the paper tests the efficiency of the market across the periods of structural breaks. It is found that the markets have become weak-form efficient only since the second half of 2003, corresponding to the period of the third structural break.

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    File URL: http://mpra.ub.uni-muenchen.de/19433/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19433.

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    Date of creation: Jun 2009
    Date of revision: Dec 2009
    Handle: RePEc:pra:mprapa:19433

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    Keywords: Efficient Markets Hypothesis; Indian Stock Market; Structural Break; Bai-Perron; Paretian Distribution; Runs test;

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    1. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    2. Bailey,Roy E., 2005. "The Economics of Financial Markets," Cambridge Books, Cambridge University Press, number 9780521612807, November.
    3. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
    4. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    5. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
    6. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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