The Random Walk Model in the Pakistani Equity market: An Examination
AbstractThis paper examines the validity of the Random Walk Model in the Pakistani equity market. The model, extensively tested in other equity markets, implies that past movements in a stock price are not helpful in predicting future prices of that stock. The model states that changes in stock prices are serially independent and conform to some probability distribution. Conventionally, the independence part is examined through Serial Correlation Test, whereas the distributional aspect is analysed through Frequency Distributions. Same techniques are applied in this paper on daily closing prices of 36 individual stocks, 8 sector indices, and a market index from January 1, 1989 to December 30, 1993. The analysis indicates that the Random Walk Model is not valid in the Pakistani equity market as is the case in other emerging markets. The results show the presence of strong serial dependence in stock returns and indicate the slow adjustment of the market to new information. This points to the weaknesses of the market regarding the dissemination of pertinent information to potential investors, indicating that effective measures should be taken in this regard. The shape of the distribution reveals that stock returns in the Pakistani market, like in other equity markets, do not comply with the normal distribution, implying that theoretical models must be used with caution.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 5034.
Date of creation: 1997
Date of revision:
Publication status: Published in The Pakistan Development Review 3.36(1997): pp. 221-240
Stock Prices; Random Walk; Pakistan; Emerging Market; Normal Distribution;
Other versions of this item:
- Fazal Husain, 1997. "The Random Walk Model in the Pakistani Equity Market: An Examination," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 36(3), pages 221-240.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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