A study of market efficiency in the stock market, forex market and bullion market in India

This study suggests that, run test, which are based on signs of indices / rates, do not reject efficient market hypothesis in the case of all the three markets, whereas VR tests, which capture the variation in permanent component of the series as a ratio to the total variation, reject the efficient market hypothesis in the case of the gold markets. Efficient market hypothesis in the case of Stock markets, Forex markets and Silver markets cannot be rejected based on VR tests. Since VR tests are more powerful than the run tests, it can be inferred that stock markets, forex markets and silver markets were efficient compared with gold markets during Oct 2003 - Sept. 2004. Average run length analysis for all runs and positive runs indicate that the stock markets have a greater degree of efficiency than other markets. VR graph shows that the silver markets followed by stock markets and forex markets have greater degree of efficiency than gold market. Gold is observed to be the inefficient market compared with other market because the VR graph corresponding to gold markets runs further away from the unity. The above findings have interesting implication for policy. Absence of a large number of participants to influence movement in the prices can be the reasons for lower degree of efficiency in the Gold market. This might play an adverse effect in promoting industrialization and growth in our country in the long run. Thus while formulating appropriate policies, it may be of concern to policy makers to improve the efficiency of gold market by increasing the number of participants.