Does KSE-100 Index Follows a Random Walk: An Empirical Study

Abstract

Random walk hypothesis state the prices move randomly and the past prices are not helpful i n predicting future prices . Many researches so far have been conducted to prove that hypothesis using different models and approaches . The results of these studies are contradictory. Some authors have proved that prices follow random walk while some authors have opposite opinion. In order to prove that hypothesis , in this paper Karachi stock exchange 100 index has been analyzed for random walk during July-1994 to July-2004. The index has been tested for normality , autocorrelation using Qstatistic & Dickey-Fuller test . The results support that KSe-100 index follow random walk i n both weekly and monthly return series. Because the nature o f stock price movement is complex there fore it has been recommended that new study could be undertaken that should also incorporate t he dividends and s tock spit impact on the returns , and random walk hypothesis can be retested using more powe rful models like variance ratio test.