A STUDY ON EFFICIENT MARKET HYPOTHESIS IN SELECTED AUTOMOBILE STOCKS IN INDIA DR. RAKESH KUMAR* MISS. SHALINI SAGAR** *Assistant Professor, Accountancy & Law, Dayalbagh Educational Institute, Deemed University, Uttar Pradesh, India **Research Scholar, Accountancy & Law, Dayalbagh Educational Institute, Deemed University, Uttar Pradesh, India ABSTRACT The efficient market hypothesis states that stock price should reflect to all information available, efficient stock market make available the funds for the developmental purposes. It gives opportunities to investors to diversify their variety of assets. The purposes of the study are to test which form of an efficient market hypothesis is in existence and randomness in selected five leading automobiles stocks in India., and closing prices of Ashok Leyland, Hero Motocorp, Mahindra & Mahindra, Maruti Suzuki, Tata Motors ltd. For the period of April, 2010 to March 2015, taken as sample. Runs test is adopted to find out market efficiency. In this paper runs test has been used to find out market efficiency. The stock price of the selected companies has been taken from NSE(national stock exchange); www.nseindia.com.the result shows that return of selected five automobile stocks and weekly return of Mahindra & Mahindra do not follow random walk which means market is inefficient for that period. But in weekly and monthly return of all selected company s stock follow random walk during the study period which means market is efficient. KEYWORDS: EMH, Market efficiency, runs test, stock prices. INTRODUCTION Efficient market hypothesis: The term efficient market fully reflects the degree, the pace & the accuracy of the available information being embed into security prices. Efficient market hypothesis (EMH) is an important theory in terms of the understanding of the equity markets and the cost of equity capital. it is related to random walk theory. The EMH suggests that stock prices fully reflect all information in the market and no investor is able to earn excess return on the basis of some secretly held private, public or historical information. There are three levels of efficiency: these forms of efficient market depend upon the information set and its relation to prices. 80
Weak:-The weak form of EMH is the lowest form of efficiency that defines a market as being efficient if current prices fully reflect all information contained in past prices. Semi- Strong: - The semi- strong form of the EMH states that current market prices reflect all relevant publicly available information, such information not only past prices but also data reported in a company s financial statement, company s announcement, economic factors and others. Strong form: -This form reflect all public and private information by which corporate insiders cannot make abnormal profits by exploiting their inside information about the company. Inside information is factual information which is not available to the general public. Review of Literature: 1. M. Tamilselvan and R. Madhumitha (2015), Random walk investigation in Indian market with special reference to S& P Nifty- Fifty Stocks. This study attempts to examine the weak- form efficiency of Indian stock market- National stock Exchange (NSE). This study has used the daily closing price of the Nifty Fifty stocks from 3 rd January 2011 to 24 th April 2015. To test the weak form efficiency parametric and non parametric tests called Autocorrelation, Augmented Dickey Fuller test, and Runs test performed. 2. R. Nalini (2015) Testing Random Walk hypothesis in Indian stock market A study of selected stocks listed on BSE. This study shows the price movements in share prices of BSE are random in behavior implying that one cannot use the historical prices of shares for predicting their future prices. It was proved that the weak form of market efficiency or the random walk theory is applicable in the BSE. 3. Anjala Kalsie and Jappanjyot Kaur Kalra (2015) An empirical study on efficient market hypothesis of Indian capital markets. The objective of this paper is to study the efficiency of Indian stock markets during the period 2001-2011. The weak form of efficient markets is extensively tested using NIFTY and 6 major NSE sectoral indices Pharma, IT, MNC, Bank, FMCG and Nifty junior. It concludes that Indian markets are inefficient in its weak form for the study period. 4. Srinivas K. R and Praveen K S Naik (2015) Efficient market hypothesis with reference to the selected automobile companies in India. This study tells that successive price changes are independent and consistent with the existence of 81
efficient market for securities, where in market gives the available information and actual prices at every point of time which represents a very good intrinsic value 5. Neeraj gupta and Ashwin gedam (2014). Testing of efficient market hypothesis: a study on Indian stock market. The filter rule, runs test and serial correlation are adopted to find out market efficiency. In this paper runs test has been used to find out market efficiency. The stock price of the selected companies has been taken from NSE 6. Sachin K and Kantesha Sanningammanavara (2014). The efficiency testing of weak form of the Indian stock market. This study examines the random walk hypothesis to determine the validity of weak- form efficiency for Indian stock market. from 1 st April 2004 to 31 st march 2014 used for the study. The results show that the behavior of share price displays considerably more violations of the random walk hypothesis. 7. M. Raja and J. Clement Sudhahar (2010). An empirical test of Indian stock market efficiency in respect of bonus announcement. This study is an attempt to test the efficiency of Indian stock market with respect to bonus issue announcement by IT companies. 8. K. Mallikarjuna Rao(2014). Testing of efficient market hypothesis special reference to selected automobile stocks in India. The purpose of the study is to test the weak form of an efficient market hypothesis in selected seven leading information technology stocks in India. Need of the Study: This study helps the investors who want to investing in stock market of automobile companies. By this study they check the price change of selected automobile stocks is random or not and their market efficiency. This type of study enables the investors to take appropriate decisions and subsequently help in strengthening of the capital market in economy. It also helps the fund managers to take right decisions according to efficient market hypothesis. Objectives of the study: To find out level of market efficiency in the selected automobile stocks. 82
To find out whether the past prices of the selected automobile stock are reflected on the future price. To prove whether price change of selected automobile stocks is random or not. Research Hypotheses: H 01 : price change of selected automobile stocks is random Research Methodology: 1. The study is empirical in nature 2. The sampling design is judgmental (top 5 automobile companies in market capitalization) 3. The sample size is 5 automobile companies Ashok leyland, Hero Motocorp, Mahindra & Mahindra Ltd, Maruti Suzuki, Tata Motors ltd. 4. Duration of the study: The study has considered five financial years that is from 1 st April 2010 to 31 st March 2015. 5. Data Collection: Data is collected on the basis of secondary sources. Secondary sources: the secondary data is collected from stock exchange market websites. Other data is collected from the newspapers, textbooks, journals. 6. Analysis of Data: Data is analyzed on the basis of: o Tables o Run test Analysis and Interpretations: This study seeks to test the efficient market hypothesis, by using Runs test. Runs test is a non-parametric test; it used to test the randomness of the series. It has been used to judge the randomness in the behavior of the Indian stock market. In Runs test we consider a series of price changes over a certain period of time and each price change is either designated as a plus(+) if it is an increase in price or a minus(-) if it is a decrease in price. A run exist when two consecutive changes are the same (i.e., ++ or --). When price changes in a different direction, such as +- or -+.The run ends and a new run may begin. To test for independence, the number of runs for a given series of price changes is compared with the number of runs for a given series of price changes compared with the 83
number in a table of expected values for the number of runs that should occur in a random series. Descriptive statistics of for selected automobile companies stocks: Descriptive statistics Mean Median Maximum Minimum Std.De Skewness Kurtosis Ashok leyland ltd- 37.45 75.2 80.55 11.85 1.24-1.524-0.9709 daily return weekly return 37.56 70.7 79.25 12 2.35 1.732-1.01229 monthly return 37.66 71.7 75.8 12 3.75-0.13-1.0388 Hero Motocorp- daily return 2047.32 2643.55 3258.25 1391.05 15.30-0.7641 0.9966 weekly return 2046.803 2580 3185.6 1450.55 42.93 1.56109 1.0078 monthly return 2059.52 2687 3142.2 1464.95 65.73-1.6529 1.1464 Mahindra- daily 597.032 633.1 1460.824 265.976 5.34-0.0228-0.0598 return weekly return 592.911 647.9 156528.6 279.326 15.06-1.5983 0.011622 monthly return 596.66 1439.4 1434.25 282.674 394.78-1.7232-0.01744 Maruti Suzuki- daily return 1669.034 3659.85 3725.8 916.15 31.98 1.732 1.55041 weekly return 1672.37 3629 3697.35 918.3 54.51 1.3826 1.57226 monthly return 1678.79 3648.1 3697.35 918.3 103.04 0.371226 1.66111 Tata Motors ltd- daily return 532.244 534.679 1351.145 138.172 9.47 1.6507288-0.418 weekly return 538.421 533.294 1333.68 145.84 11.56 1.2523-0.50918 monthly return 534.313 591.669 1292.47 154.447 37.65-1.726-0.4525 The descriptive statistics of daily, weekly and monthly series of five selected automobile stocks is presented above, the lowest mean is observed in Ashok Leyland with the values of daily(37.45), weekly (37.56) and monthly (37.66) and highest monthly are for hero Motocorps (2059.52). In other words the risk measured using s.d is higher in Mahindra& Mahindra and Maruti stocks. To test the independence of the prices, we require: Total Number of Runs: Number of Positive Price Changes: Number of Negative Price Changes: (r) (n1) (n2) The mean and the standard deviation are calculated by using the formula given below: Mean, µ(r) = Standard Deviation, σ(r) = 84
Level of significance: The Runs test is applied at 5% significance level where z= 1.96 Calculating lower limit and upper limit: Here, Lower limit: {µ -1.96*(σ)} Upper limit: {µ +1.96*(σ)} Where µ= mean σ= standard deviation Showing the result of Hypothesis Testing: Company's Name Ashok Leyland Hero motocorp Mahindra &Mahindra Maruti Suzuki Tata Motors ltd. Time period N n1 n2 Observed runs mean(µ) s.d(σ) Lower limit Upper limit Hypothesis testing at a given level of significance 1291 648 643 578 646.49 17.95 611.3 681.67 H0 is rejected 263 130 133 130 132.48 8.09 116.62 148.33 H0 is accepted 59 29 30 29 30.49 3.8 23.04 37.93 H0 is accepted 1288 666 622 597 644.24 17.91 609.13 679.34 H0 is rejected 263 130 133 127 132.48 8.54 115.74 149.21 H0 is accepted 59 28 31 32 30.42 3.79 22.99 37.84 H0 is accepted 1293 597 696 588 643.7 17.86 608.69 678.7 H0 is rejected 263 116 147 147 130.67 7.98 115.02 146.31 H0 is rejected 59 22 37 33 28.59 3.55 21.63 35.54 H0 is accepted 1268 652 616 582 634.48 17.78 599.63 669.32 H0 is rejected 263 127 136 132 132.34 8.08 116.5 148.17 H0 is accepted 59 25 34 26 29.81 3.71 22.53 37.08 H0 is accepted 1282 613 669 595 640.77 17.86 605.76 675.77 H0 is rejected 263 126 137 125 132.26 8.07 116.44 148.07 H0 is accepted 59 26 33 25 30.08 3.75 22.73 37.43 H0 is accepted 85
Results of Runs test: 1.Ashok Leyland: -In this we can observed number of runs not falls within the upper and lower limit, so we can conclude that the prices are dependent at 5% level of significance (H0 is rejected.) thus the price change of Ashok Leyland is not random in daily return. In weekly & monthly return we can observed number of runs falls within the upper and lower limit, we can say that the prices are independent at 5% level of significance (H0 is accepted.) which means market is efficient and the price change of Ashok Leyland is random. 2.Hero Motocorp: - In this we can see that the number of runs not falls within the upper and lower limit, we can conclude that the prices are dependent at 5% level of significance (H0 is rejected.) therefore the price change of Hero Motocorp is not random in daily return. In weekly & monthly return we can say that the number of runs falls within the upper and lower limit, we can conclude that the prices are independent at 5% level of significance (H0 is accepted.) so the price change of Hero Motocorp is random, 3.Mahindra &Mahindra: - In this return & weekly return of company shows number of runs not falls within the upper and lower limit, we can conclude that the prices are dependent at 5% level of significance (H0 is rejected.) so that the price change of Mahindra & Mahindra is not random. And in monthly return we observed number of runs falls within the upper and lower limit, so we can say the prices are independent at 5% level of significance (H0 is accepted.) thence the price change of Mahindra & Mahindra is random. It defined efficiency of market is present. 4.Maruti Suzuki: - The daily return of this company shows that number of runs not falls within the upper and lower limit, we can conclude that the prices are dependent at 5% level of significance (H0 is rejected.) thus the price change of Maruti Suzuki is not random. And in and monthly return we observed that number of runs falls within the upper and lower limit, so the prices are independent at 5% level of significance (H0 is accepted.)we can say that the price change of Maruti Suzuki is random and follow weak form. 5.Tata Motors Ltd.: -The observed number of runs not falls within the upper and lower limit of daily return of this company, so the prices are dependent at 5% level of significance (H0 is rejected.) obibanum the price change of Tata Motors Ltd. is not random. In weekly & monthly return of this company shows the observed number of runs falls within the upper and lower limit, so we can conclude that the prices are independent at 5% level of significance (H0 is accepted.) Thusly the price change of Tata Motors Ltd is random for weekly and monthly return and market is efficient. 86
Findings:-In all five companies(ashok Leyland, Hero Motocorp, Mahindra & Mahindra, Maruti Suzuki and Tata motors ltd.) the daily return and weekly return of Mahindra & Mahindra shows H0 is rejected which means at that period market is not efficient and not in a weak form, i.e. share price move dependently of each other during these successive days. And in remaining all five companies the weekly(except Mahindra & Mahindra ) and monthly return shows H0 is accepted which shows that the stock price of these companies are in a weak form, i.e. share price move independently of each other during these period. Conclusion The market is said to be efficient with respect to the information which reflects the price completely or fully. Stock market of automobile companies is in weak form according to weekly and monthly return of selected companies hence share prices are moving independently and the stock prices data or series have randomness and the past prices reflected on future prices. Scope of Research: - The study considered only runs test as a method of analyzing randomness of stock prices of automobile companies. As there are some other methods also for analyzing the stationary or randomness of data or series. Thus, further studies are warranted to check the randomness and stationary in stock market. REFERENCES:- 1. Gupta, N. and Gedam, A. (2014). Testing of efficient market hypothesis: a study on Indian stock market. IOSR journal of business and management. 16(8), e- ISSN: 2278-487X, p-issn: 2319-7668. 2. K, Sachin. & Sanningammanavara, K.(2014). The efficiency testing of weak form of the Indian stock market. International journal of engineering and management research. 4(4), ISSN: 2250-0758. 3. Kalsie, A. and Kalra J.K. (2015). An empirical study on efficient market hypothesis of Indian capital markets. Journal of management research and analysis, 5(2):108-114. 4. Nalini, R. (2015). Testing random walk hypothesis in Indian stock market A study of selected stocks listed on BSE. Vishwakarma business review, 5(1), ISSN: 2229-6514. 5. R,K, Srinivas.and Naik, K. S, Praveen. (2015). Efficient market hypothesis with reference to the selected automobile companies in India. Asia pacific journal of research. 1(26), ISSN:2320-5504, E- ISSN- 2347-4793. 6. Raja, M.(2010). An empirical test of Indian stock market efficiency in respect of bonus announcement. Asia pacific journal of finance and banking research. 4(4). 7. Rao, K.M.(2014). Testing of efficient market hypothesis special reference to selected information technology stocks in India. Indian journal of accounting. XLVI(1), ISSN- 0972-1479. 8. Tamilselvan, M. (2015). Random walk investigation in Indian market with special reference to S & P Nifty- Fifty stocks, International journal of finance & banking studies, IJFBS, 4(4), ISSN: 2147-4486. 87