Testing the Random Walk Hypothesis: A Case of Pakistan

Abstract

Random walk hypothesis is one of the models designed to empirically test the stock price behavior. Rejection of Random walk hypothesis (RWH hereafter) implies that stock prices or stock returns can be predicted by using their own previous values. The objective of this study is to test the RWH in Pakistani equity market which is an important emerging market and moreover, characterized by high turnover and high price volatility. This study incorporates the monthly data of 83 individual stocks categorized in 26 sector, covering the period from February 2009 to December 2015. In order to check the random walk hypothesis Augmented Dickey Fuller test, the Phillip-Perron Test and The Runs test are applied. Findings suggest that the KSE-100 stock returns are predictable on the basis of past information and the investors can earn the abnormal profit by following the systematic pattern. In other words, Pakistani stock market does not reflect the weak form efficiency.