Is the Indian Stock Market efficient - A comprehensive study of Bombay Stock Exchange Indices

TL;DR

This study evaluates the efficiency of the Indian Stock Market's BSE indices, finding evidence of inefficiency and suggesting investors can exploit undervalued securities due to biased random walk behavior.

Contribution

It provides a comprehensive analysis of BSE indices, demonstrating the market's inefficiency and challenging the applicability of the random walk model in India.

Findings

Indian stock indices are biased random series

Market inefficiency allows for excess returns

Random walk model does not fit Indian market data

Abstract

How an investor invests in the market is largely influenced by the market efficiency because if a market is efficient, it is extremely difficult to make excessive returns because in an efficient market there will be no undervalued securities i.e. securities whose value is less than its assumed intrinsic value, which offer returns that are higher than the deserved expected returns, given their risk. However, there is a possibility of making excessive returns if the market is not efficient. This article analyses the five popular stock indices of BSE. This would not only test the efficiency of the Indian Stock Market but also test the random walk nature of the stock market. The study undertaken in this paper has provided strong evidence in favor of the inefficient form of the Indian Stock Market. The series of stock indices in the Indian Stock Market are found to be biased random time series and the random walk model can't be applied in the Indian Stock Market. This study confirms that there is a drift in market efficiency and investors can capitalize on this by correctly choosing the securities that are undervalued.