How Efficient is Dhaka Stock Exchange in Terms of Weak Form of Market Efficiency?

Abstract

Weak form of market efficiency is quite a buzzword among the academicians of financial arena. Part of thestatistics dominated methodology of this study had used inputs of the previous studies – studies back in days of1960’s. By using monthly market return series data, the researchers had tried to check whether DSE - DhakaStock Exchange had been efficient in the weak form or not. Evidence of weak form of efficiency had been alsotested across time slabs, across share category and across industries. Both parametric and non-parametric testswere used to find out evidence of random walk behavior. To add variations in the study daily return series andunsmoothed return series were used. The researchers had not found any evidence of weak form of marketefficiency for Dhaka Stock Exchange on the whole, even though there was a sign of improvement in terms ofweak form of market efficiency across time. The returns of stocks and market portfolio were found to be autocorrelatedand market generally overreacted to information. The effectiveness of two-market anomaly basedtrading strategy (momentum and weekend effect) was tested based on ex-post return series but these strategiesfailed to garner sustainable abnormal profit. But still the researchers cannot refute the possibility of a trading ruleor a few trading rules extracting abnormal return in an inefficient market like Bangladesh. There was no real signof weak form of market efficiency across share categories and across industries. Inefficiency in the weak formwas an expected result, but whether the sign of improvement (in terms of weak form of market efficiency for therecent time slab) is sustainable in the long run or not is a big question.Keywords: Market efficiency, market anomalies, trading rule