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The Random Walk Model in the Pakistani Equity market: An Examination

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  • Husain, Fazal

Abstract

This 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5034.

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Date of creation: 1997
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Publication status: Published in The Pakistan Development Review 3.36(1997): pp. 221-240
Handle: RePEc:pra:mprapa:5034

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Keywords: Stock Prices; Random Walk; Pakistan; Emerging Market; Normal Distribution;

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  1. Conrad, Klaus & Juttner, D Johannes, 1973. "Recent Behaviour of Stock Market Prices in Germany and the Random Walk Hypothesis," Kyklos, Wiley Blackwell, Wiley Blackwell, vol. 26(3), pages 576-99.
  2. Nasir M. Khilji, 1993. "The Behaviour of Stock Returns in an Emerging Market: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 32(4), pages 593-604.
  3. Jamshed Y. Uppal, 1993. "The Internationalisation of the Pakistani Stock Market: An Empirical Investigation," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 32(4), pages 605-618.
  4. Ehsan Ahmed & J. Barkley Rosser, Jr., 1995. "Non-linear Speculative Bubbles in the Pakistani Stock Market," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 34(1), pages 25-41.
  5. Solnik, Bruno H, 1973. "Note on the Validity of the Random Walk for European Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 28(5), pages 1151-59, December.
  6. Dryden, Myles M, 1970. "A Statistical Study of U.K. Share Prices," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 17(3), pages 369-89, November.
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Cited by:
  1. Rashid, Abdul, 2007. "Stock prices and trading volume: An assessment for linear and nonlinear Granger causality," Journal of Asian Economics, Elsevier, Elsevier, vol. 18(4), pages 595-612, August.
  2. Salman Syed Ali & Khalid Mustafa, 2001. "Testing Semi-strong Form Efficiency of Stock Market," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 40(4), pages 651-674.
  3. Khalid Mustafa & Mohammed Nishat, 2007. "Testing for Market Efficiency in Emerging Markets: A Case Study of the Karachi Stock Market," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, Department of Economics, The Lahore School of Economics, vol. 12(1), pages 119-140, Jan-Jun.
  4. Akber, Ushna & Muhammad, Nabeel, 2013. "Is Pakistan Stock Market moving towards Weak-form efficiency? Evidence from the Karachi Stock Exchange and the Random Walk Nature of free-float of shares of KSE 30 Index," MPRA Paper, University Library of Munich, Germany 49128, University Library of Munich, Germany.
  5. Hiremath, Gourishankar S & Bandi, Kamaiah, 2009. "On the random walk characteristics of stock returns in India," MPRA Paper, University Library of Munich, Germany 46499, University Library of Munich, Germany.

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