Testing Weak Form Of Market Effiencey Evidence From Karachi Stock Exchange-100 Index

Market can be operational efficient or informational efficient. "Market efficiency is generally used in terms of operations which stresses on allocation of resources to ease the operations of the market. However, in financial literature the term "Efficient market" refers to the market which reflects the information in the prices of the stock. A market will be informational efficient, when all the available information is incorporated in the share prices and where the future share prices cannot be predicted on the basis of available information.Eugene F. Fama (1960), An American economist proposed the "Efficient Market Hypothesis". Efficient Market Hypothesis states that "all the available information in the market are incorporated in share prices and predictions about future share prices are impossible from past information or new event information".There are three types of Efficient Market Hypothesis:(â…°) Weak Form of Efficient Market Hypothesis, (â…±) Semi-Strong Form of Efficient Market Hypothesis and (â…²) Strong Form of Efficient Market Hypothesis. Weak Form of Efficient Market Hypothesis refers to the market where the past information is completely incorporated in share prices and where investors cannot predict future share prices on the basis of past information. Semi-Strong Form of Efficient Market Hypothesis refers to the market where past and public information are completely incorporated in share prices and where investors cannot predict future prices on the basis of past and public information. Strong Form of Efficient Market Hypothesis refers to the market where public and private information are completely incorporated in share prices and where investors cannot predict future prices on the basis of public and private information.Past information refers to the information about previous periods. For example; share prices of the previous periods. Public information refers to the information that is known to everyone. For example; companies announced earnings and dividends. Private information refers to the information that is known only to a boss, board of directors and internal management etc. For example; the decision about merging with another company.This research work is the empirical examination of Karachi Stock Exchange 100 Index (KSE 100 Index) to investigate whether the Pakistani Stock Market follow weak form of Market Efficiency or not. The weekly sample data of Karachi Stock Exchange 100 Index is examined over the sample period of June-2004 to June-2014. This sample period is consists of 523 total number of observations.This research work is composed of two null hypotheses that are "Karachi Stock Exchange follows Random Walk Model" and "Karachi Stock Exchange is efficient in weak form". The Random Walk Hypothesis is the eventual criteria for testing the Weak Form of Efficient Market Hypothesis. The random movement in the series of stock prices makes assured that consecutive prices of stock are autonomous and identically circulated. The Random Walk Hypothesis assured that existing prices are autonomous of previous prices and are not helpful in the prediction of future prices events.Four types of techniques are incorporated in this research work to investigate whether the KSC 100 Index is efficient in weak form or not. These four techniques are (i) Unit Root Test (ii) Descriptive Statistics (iii) Autocorrelation Test and (iv) Regression Analysis.The outcomes of Augmented Dickey-Fuller Unit Root test and Phillips-Perron Unit Root test at level rejected the hypothesis of non-stationarity at 5% significance for the return series of the closing prices of KSE 100 Index, which reveal that Random Walk Hypothesis is not followed by KSE 100 Index.The Descriptive statistics revealed that the value of Mean of the series of return which is 0.003798 is less than the value of Standard deviation which is 0.033472, that revealed that the distribution of a series of return does not have a normal distribution. The outcomes revealed that the value of returns is negative as the series of return is negatively skewed; as the skewness is-1.238284. It has a positive kurtosis of 8.947716 more than 3 which are not normal (Kendall in 1943 calculated the value for a normal kurtosis which is 3).The Autocorrelation test revealed that the time series of returns is significant as different values are not equivalent to zero at different lags, and thus rejected null hypothesis for no autocorrelation. The lag order is taken only 18. This function defines the pattern of sequential dependence in the time series of returns.Regression analysis revealed that KSE 100 Index is not a weak form of efficient market, because the valve of al (intercept coefficient) is 0.003298, which is greater than zero and the valve of cc2 (slope coefficient) is 0.132224, which is less than unity.The projected outcomes conclude that series of return has a negatively skewed and leptokurtic distribution which is a non-normal distribution, as shown by Descriptive statistics. The Unit Root test and Autocorrelation Q-statistics rejected the Random Walk Hypothesis (RWH) for the series of returns of selected period. The outcomes are not consistent with Efficiency theory as the returns of stock are not found to follow the Random Walk Hypothesis.So the empirical examination of Karachi Stock Exchange 100 Index reveals that the Pakistani Stock Market is not efficient in weak form and the prices of stock are predictable and players of Stock Marker can earn more profits and more returns by making high-quality strategies.