Effects of Market Reforms and External Shocks on Indian Stock Indices: Evidence on Structural Breaks and Weak-Form Efficiency
DOI:
https://doi.org/10.6000/1929-7092.2017.06.44Keywords:
Indian Stock Market, Efficient Market Hypothesis, Random Walk, Mean-Reversion, Structural Break, Unit Root TestAbstract
This study explores stock market efficiency in India after allowing for potential structural changes induced by reforms processes and/or external shocks. The endogenous determination of structural break dates, using mostly Clemente, Montanes, & Reyes (1998) (CMR) methodology, allows us to identify important events in this respect. External shocks such as occasional stock market scams, policy and political regime changes, oil price shocks and the effect of global market meltdowns have caused abrupt or one time changes in the series mean (additive outlier model), while the reforms processes stand out to be the single most important cause for the gradual shifts in the level of stock indices (innovation outlier model). This underlines the importance of institution building and the domestic policy stance in countering external shocks.
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https://doi.org/10.2753/REE1540-496X440501
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https://doi.org/10.1016/0304-3932(82)90012-5
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Perron, P. 1997. ""Further Evidence on Breaking Trend Functions in Macroeconomic Variables."" Journal of Economics 80 (2): 355-385.
https://doi.org/10.1016/S0304-4076(97)00049-3
Perron, P. (1990).""Testing for a Unit Root in a Time Series with a Changing Mean."" Journal of Business & Economic Statistics 8 (2):153-162.
https://doi.org/10.1080/07350015.1990.10509786
Perron, P. (1989). ""The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis."" Econometrica 57 (6):1361-1401.
https://doi.org/10.2307/1913712
Perron, P, and T J Vogelsang. 1992. ""Testing for a Unit Root in a Time Series with a Changing Mean: Corrections and Extensions."" Journal of Business & Economic Statistics 10(4):467-470.
https://doi.org/10.1080/07350015.1992.10509923
Rao, Krishna N, and K Mukherjee. 1971. ""Random Walk Hypothesis: An Empirical Study."" Arthaniti 14 (1-2): 53-58.
Sasidharan, A. 2009. “Structural Changes in India's Stock Markets' Efficiency.” MPRA Paper. https://mpra.ub.uni-muenchen.de/19433/
Suri, Davinder. 2015.""The Indian Stock Market – is it a Random Walk?"" International Journal of Economic and Business Management 3(2):6-12.
Vogelsang, T J, and P Perron.1998. ""Additional Tests for a Unit Root Allowing for a Break in the Trend at an Unknown Time."" International Economic Review 39(4): 1073-1100.
https://doi.org/10.2307/2527353
Zivolt, E, and D WK Andrews. 1992. ""Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-root Hypothesis."" Journal of Business and Economic Statistics 10 (3): 251-270
Ahmed, K. M., S. Ashraf and S. Ahmed. 2006. “Testing Weak Form Efficiency of Indian Stock Markets.” Economic and Political Weekly 41(1): 49-56.
Aloui, C. 2005. ""Long-range Dependence in Daily Volatility on Tunisian Stock Market."" Economic Research Forum Working Paper 40.
Bai, J, and P Perron. 1998. ""Estimating and Testing Linear Models with Multiple Structural Changes."" Econometrica 66 (1): 47-78.
https://doi.org/10.2307/2998540
Banerjee, A, R L Lumsdaine, and J H Stock. 1992. ""Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence."" Journal of Business & Economic Statistics 10: 271-287.
https://doi.org/10.1080/07350015.1992.10509905
Baum, C F, J T Barkoulas, and M Caglayan. 1999. ""Long Memory or Structural Breaks: Can either Explain Nonstationary Exchange Rates under the Current Float."" Journal of International Financial Markets, Institutions, and Money 9 (4):359-376.
https://doi.org/10.1016/S1042-4431(99)00018-9
Baum, Christopher F. 2005. ""Stata: The Language of Choice for Time-Series Analysis?"" Stata Journal 5 (1):46-63.
Blavy, R. 2002. ""Changing Volatility in Emerging Markets: a Case Study of Two Middle Eastern Stock Exchanges."" Revue Entente Cordiale Autumn 2(1):1-35.
Bose, S. and D. Coondoo. 2004. “The Impact of FII Regulations in India: A Time-Series Intervention Analysis of Equity Flows.” Money & Finance July-December. https://papers.ssrn.com/ sol3/papers.cfm?abstract_id=755324
Chordia, T, R Roll, and A Subrahmanyam. 2005. ""Evidence on the Speed of Convergence to Market Efficiency."" Journal of Financial Economics 76 (2): 271-292.
https://doi.org/10.1016/j.jfineco.2004.06.004
Clemente, J, A Monta˜n´es, and M Reyes. 1998. ""Testing for a Unit Root in Variables with a Double Change in the Mean."" Economics Letters 59 (2):175-182.
https://doi.org/10.1016/S0165-1765(98)00052-4
DeBondt, W.F.M. 1991. ""What Do Economists Know about the Stock Market."" Journal of Portfolio Management 17: 84-91.
Dickey, D A, and W Fuller. 1979. ""Distribution of the Estimators for Autoregressive Time Series with a Unit Root."" Journal of the American Statistical Association 74 (366):427-431.
https://doi.org/10.2307/2286348
El-Erian, M A, and M S Kumar. 1995. ""Emerging Equity Markets in Middle Eastern Countries."" International Monetary Fund Staff Paper 42 (2): 313-343.
https://doi.org/10.2307/3867575
Fama, E F. 1991. ""Efficient Capital Markets: II."" Journal of Finance 46 (5): 1575-1617.
https://doi.org/10.1111/j.1540-6261.1991.tb04636.x
Fama, Eugene F. 1970. ""Efficient Capital Markets: A Review of Theory and Empirical Work."" Journal of Finance 25 (2 ): 383-417.
https://doi.org/10.2307/2325486
Gupta, R. and P.K. Basu. 2007. “Weak Form Efficiency of Indian Stock Markets.” International Business and Economics Research Journal 6:57-64.
Gupta, R. and J. Yang. 2011.“Testing Weak form Efficiency in the Indian Capital Market.” International Research Journal of Finance and Economics 75:108-119.
Hiremath, G S, and B Kamiah. 2010.""Do Stock Returns in India Exhibit a Mean-Reverting Tendency? Evidence from Multiple Structural Breaks Test."" Banking and Finance Letters 2(4): 371:390.
Jadhav. N. 2006. “Development of Securities Markets: The Indian Experience.” in China and India: Learning from Each Other: Reforms and Policies for Sustained Growth. International Monetary Fund.
Jethwani, Kinjal, and Sarla Achuthan. 2013. ""Stock Market Efficiency and Crisis:Evidence from India."" Asia-Pacific Finance and Accounting Review 1(2):35-43.
Lagoarde-Segot, Thomas, and Brain M Lucey. 2008. ""Efficiency in Emerging Markets—Evidence from the MENA Region."" Journal of International Financial Mrkets, Institutions & Money 18 (1):94-105.
https://doi.org/10.1016/j.intfin.2006.06.003
Leybourne, S, T Mills, and P Newbold. 1998. ""Spurious Rejections by Dickey-Fuller Tests in the Presence of a Break under the Null."" Journal of Econometrics 87(1):191-203.
https://doi.org/10.1016/S0304-4076(98)00014-1
Lumsdaine, R, and D Papell.1997. ""Multiple Trend Breaks and the Unit Root Hypothesis."" Review of Economics and Statistics 79 (2):212-218.
https://doi.org/10.1162/003465397556791
Malkiel, B G. 2003. ""The Efficient Market Hypothesis and ts Critics."" Journal of Economic Perspectives 17(1): 59-82.
https://doi.org/10.1257/089533003321164958
Mishra, Ankita, Vinod Mishra, and Russel Smyth. 2014. ""The Random-Walk Hypothesis on the Indian Stock Market."" Monash University Department of Economics Discussion Paper 07/14.
Mishra, P.K. 2012. “Efficiency of South Asian Capital Markets An Empirical Analysis.” Pakistan Journal of Commerce and Social Sciences 6 (1): 27-34.
Mobarek, A, and K Keasey.2000. ""Weak form Efficiency of an Emerging Market: Evidence from Dhaka Stock Market of Bangladesh."" Paper Presented at the ENBS Conference held on Oslo.
Mukherjee, P. and S. Bose. 2008. “Does the Stock Market in India Move with Asia? A Multivariate Cointegration-Vector Autoregression Approach.” Emerging Markets Finance & Trade 44(5): 5-22.
https://doi.org/10.2753/REE1540-496X440501
Nelson, C. R. and C. I. Plosser.1982. “Trends and Random Walks in Macroeconomic Time Series: Some Evidence and Implications.” Journal of Monetary Economics 10(2): 139-162.
https://doi.org/10.1016/0304-3932(82)90012-5
Perron, P. 1989. “The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis.” Econometrica 57(6): 1361-1401.
https://doi.org/10.2307/1913712
Perron, P. 2006. ""Dealing with Structural Breaks."" Pp. 278-352 in Palgrave Handbook of Econometrics . Vol. 1, edited by K. Patterson and T. C. Mills : Palgrave Macmillan
Perron, P. 1997. ""Further Evidence on Breaking Trend Functions in Macroeconomic Variables."" Journal of Economics 80 (2): 355-385.
https://doi.org/10.1016/S0304-4076(97)00049-3
Perron, P. (1990).""Testing for a Unit Root in a Time Series with a Changing Mean."" Journal of Business & Economic Statistics 8 (2):153-162.
https://doi.org/10.1080/07350015.1990.10509786
Perron, P. (1989). ""The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis."" Econometrica 57 (6):1361-1401.
https://doi.org/10.2307/1913712
Perron, P, and T J Vogelsang. 1992. ""Testing for a Unit Root in a Time Series with a Changing Mean: Corrections and Extensions."" Journal of Business & Economic Statistics 10(4):467-470.
https://doi.org/10.1080/07350015.1992.10509923
Rao, Krishna N, and K Mukherjee. 1971. ""Random Walk Hypothesis: An Empirical Study."" Arthaniti 14 (1-2): 53-58.
Sasidharan, A. 2009. “Structural Changes in India's Stock Markets' Efficiency.” MPRA Paper. https://mpra.ub.uni-muenchen.de/19433/
Suri, Davinder. 2015.""The Indian Stock Market – is it a Random Walk?"" International Journal of Economic and Business Management 3(2):6-12.
Vogelsang, T J, and P Perron.1998. ""Additional Tests for a Unit Root Allowing for a Break in the Trend at an Unknown Time."" International Economic Review 39(4): 1073-1100.
https://doi.org/10.2307/2527353
Zivolt, E, and D WK Andrews. 1992. ""Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-root Hypothesis."" Journal of Business and Economic Statistics 10 (3): 251-270
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Published
2017-08-23
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Chattopadhyay, S., & Bose, S. (2017). Effects of Market Reforms and External Shocks on Indian Stock Indices: Evidence on Structural Breaks and Weak-Form Efficiency. Journal of Reviews on Global Economics, 6, 426–442. https://doi.org/10.6000/1929-7092.2017.06.44
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