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Testing the Weak Form Efficiency in Pakistan’s Equity, Badla and Money Markets

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  • Rashid, Abdul
  • Husain, Fazal

Abstract

The paper test the weak form market efficient hypothesis for Pakistan’s equity, badla and money markets with an aim to investigate which one of them is most efficient in the weak form sense. The analysis provides evidence, under the assumption of heteroscedasticity, that the KSE is weak-form efficient over the full-length sample period. Nevertheless, the analysis reports that over the same period the other two markets viz. badla and money are not weak form efficient. The badla market was efficient over the first sub-period. An important finding of this effort is that “badla mechanism” became weak form inefficient after equity market severely affected in February 2005. Inefficient badla market may be one of the major reasons behind the malicious instability of the equity market in Pakistan. We hope that this finding can guide the policymakers in formulating strategies to provide a weighing scale in financial mechanism.

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File URL: http://mpra.ub.uni-muenchen.de/22285/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22285.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:22285

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Related research

Keywords: Weak Form Efficiency; Stock Returns; Badla Rate; Repo Rate; March Crises; Variance-Ratio Tests;

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  1. Neftci, Salih N & Policano, Andrew J, 1990. "On Some Sample Path Properties of Intra-day Futures Prices," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 529-36, August.
  2. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  3. Bessembinder, Hendrik & Chan, Kalok, 1992. "Time-varying risk premia and forecastable returns in futures markets," Journal of Financial Economics, Elsevier, vol. 32(2), pages 169-193, October.
  4. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
  5. Richardson, Matthew P & Smith, Tom, 1994. "A Unified Approach to Testing for Serial Correlation in Stock Returns," The Journal of Business, University of Chicago Press, vol. 67(3), pages 371-99, July.
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