Testing the Random Walk Model in Indian Stock Markets

Abstract

The present study attempts to examine the random movements in stock indices in the Indian equity market. It tests the random walk hypotheses in daily, weekly and monthly returns of six Indian stock market indices from January 2000 to October 2009. The indices considered for the purpose of the study include Nifty, CNX Nifty Junior, NSE 500, SENSEX, BSE 100 and BSE 500. The study uses Jarque-Bera (JB) Test for testing normality in return series. It also applies Box Pierce Q-Statistics and Ljung-Box (LB)statistics, and Augmented Dickey-Fuller (ADF) test to test whether return series follow random walk or not. The results indicate that there are no random movements in share indices. However, when we apply Lo and MacKinlay (1988) variance ratio test under the assumptions of both homoskedasticity and heteroskedasticity, we observe contradictory results. It is also found that sometimes heteroskedasticity is the source of non-random behavior in share indices.