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Analysis & Test of Market Efficiency: A Case Study of KSE

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  • Shaikh, Slam Ahmed

Abstract

This study employs more recent and comprehensive data (1997-2013) for the empirical verification of weak form efficiency in Karachi Stock Exchange (KSE). We use Augmented Dickey Fuller (ADF) and Philips-Perron (PP) tests to detect unit root in the daily returns series. Further, we run Random Walk Model (RWM) to detect unit root in returns series. We use Runs test to detect any possible serial correlation in residuals. Results are in support of weak form efficiency. However, the study argues that strong form efficiency does not exist in KSE. We compare equity funds returns with KSE 100 Index returns for 10 years (2003-2012) and we find that the mean returns and standard deviations are not much different. However, the correlation between the returns is found to be low which indicates that equity funds do not mimic market index and have very concentrated portfolios comprising of growth stocks. Finally, we also compare the returns and Sharpe ratio for Islamic and conventional equity mutual funds. Since Islamic funds due to investment and trading restrictions can not exactly mimic market portfolio, the return comparison could help in studying whether the contention of EMH proponents that expert investors too can do as good as earning returns on market portfolio is entirely valid or are there some qualifications and exceptions. We report evidence that challenges the EMH proposition.

Suggested Citation

  • Shaikh, Slam Ahmed, 2016. "Analysis & Test of Market Efficiency: A Case Study of KSE," MPRA Paper 68743, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68743
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    References listed on IDEAS

    as
    1. Abid Hameed & Hammad Ashraf, 2006. "Stock Market Volatility and Weak-form Efficiency: Evidence from an Emerging Market," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(4), pages 1029-1040.
    2. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, May.
    3. Jensen, Michael C., 1978. "Some anomalous evidence regarding market efficiency," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 95-101.
    4. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    5. repec:lje:journl:v:1:y:2007:i:1:p:119-140 is not listed on IDEAS
    6. 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, vol. 12(1), pages 119-140, Jan-Jun.
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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