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Structural Changes in India's Stock Markets' Efficiency

By Anand Sasidharan

Abstract

This paper finds evidence that the Indian stock market has become weak-form efficient, off-late. We proceed by, first, locating structural breaks in the index using Bai-Perron's method for endogenous multiple structural changes. Four structural breaks are identified for the period 1991 to 2008 for the S&P CNX Nifty series -- December 1994, July 1999, June 2003 and January 2006. For this period the behaviour of returns approximates a Stable Paretian distribution. This would mean that the market risk will be beyond that can be predicted by measures build on the assumption of normality of returns. The property of infinite population variance of a stable paretian distribution makes variance based estimators redundant. Therefore, using non-parametric methods the paper tests the efficiency of the market across the periods of structural breaks. It is found that the markets have become weak-form efficient only since the second half of 2003, corresponding to the period of the third structural break.

Topics: G14 - Information and Market Efficiency; Event Studies, C16 - Specific Distributions, C14 - Semiparametric and Nonparametric Methods: General
Year: 2009
OAI identifier: oai:mpra.ub.uni-muenchen.de:19501

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