Variance Ratio Test in Pakistani Stock Market

Abstract

This study is an attempt to investigate the evidence of random walk on KSE-100, KSE-30, all-share index, KMI-30 from Pakistan stock exchange (PSX) and 40 independent firms from randomly selected for the period from January 01, 2009 to August 31, 2014 by using the conventional Lo and Mackinlay (1988). Both positive and negative autocorrelation is found in the return series of indices and individual stocks. KSE-100 shows negative autocorrelation, KSE-all and KMI-30 are positively autocorrelated. Large number of firms have found to possess negative correlation and profits are earned by mean reversion trend. For KSE-30 and for 10 other firms the null hypothesis of random walk cannot be rejected revealing unpredictability in KSE-30. Therefore, it is concluded that large investors earn profits by over-reaction and small investors by trend-chasing in the market where possible.

Keywords: Variance ratio test, Pakistan stock exchange; random walk

DOI: 10.7176/EJBM/11-9-11

Publication date:March 31^st 2019