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- Title
On the Validity of Random Walk Hypothesis in the Colombo Stock Exchange, Sri Lanka.
- Authors
Chakraborty, Madhumita
- Abstract
This study investigates the stock price behavior in Sri Lanka using daily closing prices of Milanka Price Index and twenty five individual companies underlying the index. A battery of tests, viz., unit root test, serial correlation test, runs test, Lo-MacKinlay variance ratio test as well as Chow-Denning's multiple variance ratio test have been applied. The unit root tests provided evidence in favor of stationarity of return series. The results of the rest of the tests suggest dependency of the aggregate market return series, which violates the assumption of random walk hypothesis. For the individual companies, however, the results manifest mixed behavior. Some sample stocks exhibit random walk behavior while others appear to deviate from a random walk. The study has also developed one forecasting model for the aggregate market returns using the ARMA process. The ARMA (5, 0) model has been found to be an appropriate model for forecasting future returns to the Milanka Price index and one may earn extra returns by developing trading rules accordingly.
- Subjects
COLOMBO (Sri Lanka); SRI Lanka; STOCK exchanges; STOCK price forecasting; PRICE indexes; STOCK prices
- Publication
Decision (0304-0941), 2006, Vol 33, Issue 1, p135
- ISSN
0304-0941
- Publication type
Article