Stock Market Prices Follow the Random Walks: Evidence from the Efficiency of Karachi Stock Exchange
Keywords:
Random Walk Hypothesis, Efficiency Market Hypothesis, KSEAbstract
This study examines the behavior of the Karachi Stock Exchange (KSE) with respect to the movement of share prices for companies listed on the KSE-100 Index and explores how these prices align with the Random Walk Hypothesis (RWH). It highlights that while the prices of securities are co-integrated, their future movements cannot always be predicted. Using historical data from January 2, 2001, to November 15, 2011—comprising 2,672 observations of the closing share price index of the top 100 companies—the study employs advanced econometric techniques, including the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests and the Johansen Co-integration test, to assess market efficiency. The findings indicate that the KSE-100 Index adheres to the principles of the RWH and Efficient Market Hypothesis (EMH), confirming that KSE is an efficient financial market capable of rapidly adjusting to new information, rendering the prediction of security prices impossible and preventing abnormal returns. By applying robust methodologies, this research provides a deeper understanding of the KSE’s behavior and its adherence to market efficiency principles, contributing to reliable insights into the dynamics of emerging financial markets.
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