Stock Market Efficiency: Evidence from Pakistan

Abstract

Stock traders and potential and smart investors closely watch track-record of all listed companies on stock exchanges to make sure if future rate of return could be predicted on the basis of past data. To help the investors predict future rate of return, we analyzed the stock market's efficiency using ARMA and GARCH models. This study focused on the weak form efficiency of stock markets with the intention that if it is verified only then strong forms can be tested. The results, shown in the tables and graphs, indicate that the daily, weekly and monthly returns for KSE-100 index are stationary at their levels. Stationarity of rates of return series goes against the weak form efficiency. It means that future rate of return can be predicted to some extent on the basis of past data either by ARMA models or by GARCH models or by both. We found that the Efficient Market Hypothesis does not hold, so far, at both micro and macro levels in case of the Karachi Stock Exchange in Pakistan. The main contribution of this study is that it tests the Efficient Market Hypothesis for daily, weekly and monthly returns; from July 1995 to December 2007, on the premier stock exchange of the country in context of Pakistan that is KSE-100.