Capital Market Efficiency in India: Micro- and Macro-Level Implications

Abstract

The concept of capital market efficiency occupies the central place in the theory of asset pricing, fund allocation and portfolio management. The supporters of the efficient market hypothesis argue that the stock returns are basically random and thus, any speculation based on past information is fruitless. So we wanted to know whether such a claim holds in the in the Indian context, especially in the aftermath of financial recession. This paper examined the weak form of efficient market hypothesis in a random walk framework. The results indicate that the Indian capital market is not weak form efficient. This has implications both for the investors and the economy as a whole. The investor can use fundamental as well as technical analyses to beat the market and earn excess returns. And, the economy may experience mal-allocation of resources which has negative effects on long-run growth of the nation. Therefore, the institutions, market operations and market micro-structure need to be strengthened to have an efficient capital market.