Chapter 2

Literature Review

Hassan et al. (2007) worked on weak form efficiency and random walk with respect to Pakistan
and they selected Karachi Stock Exchange for that. In order to test random walk and weak form
of efficiency they collected stock returns data on monthly, weekly and daily basis from 1 st
January 2000 to 31st December 2005. Jarque-Bera test, Kolmogorov-Semirnov test,
autocorrelation coefficient runs tests, ADF (Augmented Dickey-Fuller) and PP (Phillips Peron)
unit root tests and (MVR) multiple variance ratio tests were used to test random walks and
weak-form efficiency of the market. All these tests showed that monthly, weekly and daily
market returns were not market-efficient because none of the returns were described by random
walks. Since market returns were not market efficient so prices were reflecting all public
information available in the market. They also suggested that in short run the behavior of equity
markets can be predicted from the technical analysis.
Chaudhuri & Wu (2004) conducted a study to find whether stock prices in emerging markets
follow random walk or mean reversion process. They used Dickey and Feller, Philips and Peron,
and Panel-based test for this purpose. The data was collected from stock-price indexes of the
seventeen following countries: Argentina, Brazil, Chile, Colombia, Greece, India, Jordan, Korea,
Malaysia, Mexico, Nigeria, Pakistan, Philippines, Taiwan, Thailand, Venezuela, and Zimbabwe
for the period January 1985 to April 2002. The results shown that stock-price indexes of the
stated counties follow mean-reversion process.

De Bondt and Thaler (1985) conducted a study on market efficiency to investigate whether
people overreact to unexpected and dramatic news events and further on such behavior affects
the stock price. They used monthly returns data for New York Stock Exchange (NYSE) common
stock as compiled by Center for Research in Security Prices (CRSP) of the University of
Chicago for the period January 1926 to December 1982. They formed two portfolios namely
winners and losers based on extreme capital gain and loss respectively. An equally weighted
arithmetic average rate of return on all CRSP listed securities serves as the market index. Their
results shown that most people overreact to unexpected and dramatic news events and more over
losers earned more than the winners.
Mishra (2011) conducted a study to reinvestigate efficient market hypothesis in its weak form.
The data was collected from capital markets of emerging economies i.e. Brazil, India, China,
South Korea and Russia and developed economies i.e. US, Germany and UK. The data was
collected for the period starting from January 2007 to December 2010. ADF unit root test and
GARCH model was used and the results shown that the selected economies are not weak for
efficient giving scope for profitable trading.
Narayan & Smyth (2005) conducted a study to find whether stock prices can be characterized as
following a unit root or mean reversion process. The data was collected from stock markets of
G7 (USA, Canada, France, Germany, UK, Italy, Japan) countries for the period 1960 to 2003. A
unit root test with one and two structural beaks. Their results found that market of Italy possesses
stationary trend but other markets of G7 countries possess random walk process.
Koustas, Lamarche & Serletis (2008) conducted a study to find either random walk or mean
reversion exist in US stock market. The data was taken from Dow Jones industrial average for

the period starting from June 30, 1941 to March 13, 2006. They used self exciting threshold
autoregresion (SETAR) model, and found that middle segment i.e. comprised of 84%
observations possess random walk process. But lower and upper segments i.e. comprised of 5%
and 11% observations respectively possess mean reversion process.