Adaptive Market Hypothesis:

A case on National Stock Exchange ( NSE)

Definitions
Stock Exchange:
A market where listed companies shares stocks bonds exchanged.

Capital market:
The market where buyers n sellers engaged in trade financial securities.

Contd
Equity Market:
The market in which shares are issued and traded through exchanges or O.T.C

NiFTY:
NSE of Indias benchmark index for indian equity market.

Introduction
The adaptive market hypothesis, as proposed by Andrew Lo is an attempt to reconcile economic theories based on the efficient market hypothesis (which implies that markets are efficient) with behavioral economics, by applying the principles of evolution to financial interactions: competition, adoption and natural selection.

Efficient Market Hypothesis

Efficient Market Hypothesis (EMH) states that security prices fully reflect all available information.

The degree to which stock prices reflect all available, relevant information.

Contd
Market Efficiency:
Developed in 1970 Economist Eugene Fama Stated that it is not possible for an investor to outperform the market because all available information is already built into all stock prices

Forms of EMH
Weak form

Semi strong form

Strong form

Weak Form
The weak form of EMH states that the current prices fully reflect the information implied by the past prices. In weak-form efficiency, future prices cannot be predicted.
This form has been designated as the random walk hypothesis (RWH).

Tests of Weak Form

Serial correlation tests Runs tests

Random walk hypothesis

The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted.

Semi-Strong Form

The semi - strong form of the EMH states that the current stock prices reflect all publicly available information and the stock prices adjust rapidly to new information

Strong Form

strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns

Objective of the study

To develop an understanding of the various forms of efficiency of the stock market. To trace the trend of the movement of the stock market index over the study period. To test whether the Indian Equity markets, especially NSE is weak form efficient or not. To test whether the Indian Equity markets, especially NSE is semi-strong form efficient or not.

Scope of the study

Testing the efficiency of the market is very important for the investors, stock brokers, financial institutions, government etc. for understanding the functioning of the capital markets. Stock market movement gives an idea to the investors for buying and selling shares in order to earn some profits

Tools for Analysis

Runs test Autocorrelation test Event study

Runs Test
Non-parametric statistical test Used to test the hypothesis Based on the null hypothesis Two elements + and -

Contd
E(r) = 2n1n2 / (n1+ n+12 ) Where E(r) = Expected number f runs n1 = number of positive runs n2 = number of negative runs

Contd

S.E = 2n1n2 (2n1n2-n1-n2) / (n1+n2)2 (n1+n2-1) Where

S.E = Standard Error

The expected number of runs compared with the actual number of runs.

Contd
Z=

R + 0.5 E (r) ----------------S.E

Where Z = standardized value R = Actual numbers of runs 0.5 = Continuity adjustment E(r) = Expected number f runs S.E = Standard Error

Contd
The null hypothesis is rejected if the calculated number of runs falls outside the 95% confidence interval (-1.96 s = k = + 1.96 s). The null hypothesis is accepted if the value lies in between 1.96.

Rejection Region for Two-Tailed Z Test (H1: 0 ) with =0.05 The decision rule is: Reject H0 if Z < -1.960 or if Z > 1.960.

Serial Correlation tests

The relationship between a given variable and itself over various time intervals. serial correlation is used by technical analysts to determine how well the past price of a security predicts the future price.

Event Study

Semi-strong form of efficiency has been tested by event study.

Contd
Daily Returns:

Contd
Security Returns Variability (SRV):

Contd
Average Security Returns Variability:

Contd
Average Abnormal Returns:

Contd
Cumulative Abnormal Returns (CAR):

Contd
T-Test:

Analysis
Weak Form
Indices of NSE are efficient Previous indices value are effectively absorbed by todays indices Investors who follow technical analysis will not b able to earn a return This indicates that the component stocks efficient

Contd
Semi-Strong Form Steps
Collect a sample of firms Determined the prices Define the period studied Compute the daily Returns, Abnormal return, Average Abnormal return, Cumulative Abnormal Return

Contd

Markets are not efficient Abnormal Returns high Prices have been fluctuated Fundamental analysis can beat the market

Conclusion
Based on the result of runs test and auto

correlation test null hypothesis is rejected.

It is proved that Indian equity market follow random walk modal and is a weak form efficient. Indian stock market with respect to stock split, dividend and bonus announcement by companies using event study and analysis proves that markets are not efficient in semistrong form