Evidence for Weak Form Efficiency in Stock Markets: The Case of Colombo Stock Exchange

Abstract

With increased movement of investments across international boundaries owing to the integration of world economies, the understanding of efficiency of the emerging markets is also gaining greater importance. This paper investigates the weak form efficiency of the Colombo Stock Ex-change by analyzing returns on the two key indices of the exchange which are the All Share Price Index and the Milanka Price Index over a long term period commencing from the year 1985 up to the year 2009. Weak form efficiency is tested subjecting both the indices using returns both on a daily as well as a monthly basis testing the random walk hypothesis using four techniques of Autocorrelation and the use of a non-parametric test which is the runs test. Results of these tests prove that based on the daily returns that the market is weak form inefficient. When considering the monthly returns the runs test states that the market is efficient while Q statistic gives mixed results. The other tests are in line with the daily returns. The paper also considers anomalous behaviour in the Colombo Stock Exchange, with the intention of possibly identifying a day-of-the-week effect or a month-of-the-year-effect.