06 Chapter2

2.1 The Behavior of Stock Returns ................................................
17
2.2 Stock Return Predictability and Asset Pricing Theories.......... 58
2.3 Research Gap ........................................................................... 69
2.4 Research Question.................................................................... 70
In order to enable detail analysis of stock return behavior and predictability

in returns, literary contributions made by other exponents in the particular
realm so far becomes necessary. An attempt is made to review the subject
of present study to locate the exact position of the current study.
Accordingly, the literature reviewed are organised under two heads. The
first section covers the reviews related with the behavior of stock returns
in detail. Then the literature on the predictability of returns and the asset
pricing theories are covered.
2.1 The Behavior of Stock Returns

The behavior of stock returns is characterised by the nature, pattern
and magnitude of the returns. Various authors have studied the behavior of
returns in varied manner and magnitude. Some of them have stressed on
certain particular behavioral aspect of equity returns while some have
investigated the behavior of returns as a generalised whole. On the basis of
17
Chapter 2
the behavioral aspects studied by various researchers, the literature

regarding the behavior of stock returns is categorized and presented under
the subtitles viz.: (i) Randomness in returns and market efficiency, (ii)
Volatility in returns, (iii) Linearity in returns, (iv) Normality in returns, and
(v) Overall return behaviour.
2.1.1 Randomness in returns and market efficiency

It was Louis Bachelier (1900), who first denoted the random nature
of price movements of securities. In his study on theory of speculation, he
put forth a revolutionary inference on the dynamics of stock exchange. He
pointed out that, as there are infinite factors contributing to the fluctuations
in the stock exchange, a mathematically exact forecast of stock price is not
possible. Moreover, Bachelier noted that the contradictory opinions are so
divided that buyers feel the market is rising and sellers feel it falling at the
same point of time. In prevalence of such a situation, he came to an
inference that probabilities alone can be given as to the price fluctuations,
not an exact measure. Even though market cannot foresee the fluctuations,
it is possible to assess which is more or less probable to happen and that
probability can be mathematically expressed. Bachelier concluded his
study by formulating such a formula for assessing the probability that a
price be attained in a given interval of time.
Despite of the fact that Bachelier’s theory remained untouched for

decades, the fundamental stone for the emergence of the Efficient Market
Hypothesis was laid by his theory. The next step towards the theory was
put by Working (1934). While analysing time series data of wheat prices,
he observed that the wheat prices resembles to a significant extent, a
18
Review of Literature
random difference series. They resemble most closely one that might be
derived by cumulating random numbers drawn from a slightly skewed
population of standad deviation varying rather systematically through time.
After a few years, Mourice Kendall (1953) proposed the theory that
stock prices move randomly, through his paper. Thereafter, Osborne (1959)
studied the Brownian motion in the stock market. He used random series
between 1926-1954 published by F W Stephens and the Securities
Research Corporations for that. The logarithms of the stock prices are used
for the purpose of analysis. He found that, in a statistical steady state, these
logarithms of prices ensemble coordinates of a large number of molecules.
In the meantime, Paul Samuelson (1960) and Paul Cootner (1964), through
thorough discussions and interactions, popularised the work of Bachelier
and also the concept of random walk.
The term random walk was more popularized by Eugene Fama

(1965) through his article "The Behaviour of Stock-Market Prices", which
was a less technical version of his Ph.D. thesis. Fama studied the behaviour
of stock market prices by analyzing the daily prices for each of the thirty
stocks of the Dow-Jones Industrial Average. He has given equal
importance to both the theory underlying the random walk model and also
the test of model’s empirical validity. In the theory, the term dependence is
analysed in both statisticians’ view and traders’ view. It was necessary
because, in time series, perfect independence is not possible between the
values. However, it does not mean all time series values are in perfect
dependence. So, what signifies dependence in values is when the dependence
is found to be above a minimum level of acceptance. And this minimum
19
Chapter 2
level of acceptance is different from problem to problem and also from the
point of view of statistician and trader.
The validity of independence assumption of Random walk model was

tested using successive price changes for differencing intervals of one, four,
nine and sixteen days. Serial correlation model, runs test and Alexander’s
filter test were the techniques used for testing. After the analysis of the
stock prices, based on the evidence put forward by the serial-correlation
model, Fama found that, “the dependence in successive price changes is
either extremely slight or completely non-existent” (Fama, The Behavior
of Stock-Market Prices, 1965). He described the random walk assumption
as a glimpse of reality. He stressed on the fact that the independence in
successive price changes are consistent with the efficient market. The
efficient market is the market where all available information is reflected
in the securities. The implication of the result put forwarded by Fama
through the independence in efficient market is that, at any point of time,
the given security price will be the good representation of the intrinsic value
of that security.
Another significant contribution towards the random walk

assumption was by Kendall and Hill (1965). They conducted an analysis
of economic time series using particulars of 22 price-series, ranging from
486 terms at weekly intervals to 2,387 terms at weekly intervals. The series
appears in symmetry and hence normal. When they analysed the series for
finding random changes in close intervals, it was found that the random
changes were much large. They inferred that the series behave as a
wandering one. After analysing the economic time series, they concluded
20
that, “In series of prices which are observed at fairly close intervals the
random changes from one term to the next are so large as to swamp any
systematic effect which may be present. The data behave almost like
wandering series”. It was in this paper that they gave their widely discussed
inference: “The series looks like a "wandering" one, almost as if once a
week the Demon of Chance drew a random number from a symmetrical
population of fixed dispersion and added it to the current price to determine
the next week's price” (Kendall & Hill, 1953).
Thereafter in 1968, Michael C. analysed the performance of mutual

fund managers to test the strong form of market efficiency. For that he
examined the fund manager’s predictive ability or his ability to earn return
more than the return for a given level of risk through successful prediction
of security prices. He studied 115 open ended mutual funds for a period of
20 years from 1945 to 1964. The evidence on mutual fund indicated not
only that these 115 mutual funds were on average not able to predict
security price well enough to outperform a buy-the-market-and-hold
policy, but also that there is very little evidence that any individual fund
was able to do significantly better than that can be expected out of mere
random chances (Jensen, 1968). In other words, Jensen establishes the
strong form market efficiency in the market. This work of Jensen is referred
by Fama for his forthcoming paper as significant evidence.
Fama (1970) thereafter came forward with his most discussed work
on efficient market model. In the paper, he reviewed the theoretical and
empirical literature on the efficient market model. In order to test whether
the security prices fully reflect the available or given information set, he
21
Chapter 2
put forth three forms of test based on the peculiarity of the information set
that is expected to reflect in the prices. The Jensen three forms of tests for
market efficiency were weak form tests, semi-strong form tests and strong
form tests.
First, the weak form tests, where the information set is just historical
prices, are discussed. In the next, the semi-strong form tests, in which the
adjustment of prices to publicly available information like announcements
of annual earnings, financial reports by firms, new security issues, stock
splits etc. are considered. Finally, strong form tests are reviewed. It tested
whether individual has earned high trading profits than others due to the
monopolistic access to any information relevant for price information.
Fama referred Jensen’s work for establishing strong form efficiency. The
test involved studying the performance of mutual funds in two aspects. The
first aspect analysed was checking whether the fund managers have access
to special information that makes them earn abnormal returns. The second
aspect involved testing whether some funds were able to disclose such
information than others. Fama concluded that, with a few exceptions, the
efficient markets model stands up well (Fama, 1970).
Smith (1981) tested the information effect of announcement of a new

accounting rule upon the returns of firms. The results state that there is no
significant effect of such information on the returns of the selected firms.
However, critical evaluation of the randomness in stock market has

begun among several authors. Kross and Schroeder (1984) conducted an
empirical investigation to study the effect of quarterly earnings announcement
timing on stock returns. They examined the relationship between stock
22
returns and timing around the earnings announcement date. They noted
that, the earnings announcement timing was associated with abnormal
stock returns around the earnings announcement date. Moreover, abnormal
returns of firms that announced early (late) were significantly higher
(lower) than the returns of firms that announced late (early). Through these
effects, market inefficiency is highlighted (Kross & Schroeder, 1984).
Bondt and Thaler (1985), through their paper, attempted to study

overreaction in the stock market. They are of opinion that, if stock prices
consistently shoots up, then the reversal of it can be predicted based on past
return data alone rather than accounting values. More specifically they put
forward two hypotheses regarding the overreaction. First hypothesis was
that the extreme movements in the stock prices will be followed by the
price movements in the opposite direction. The second hypothesis states
the more extreme the initial price movement, the greater will be the
adjustment subsequently. Thus, in short, both the hypotheses clearly imply
the violation of weak form of market efficiency. The goal they set for the
paper was whether these overreaction hypotheses were predictive. Being
the first attempt to use a behavioural principle to predict a new market
anomaly, the empirical evidence, based on CRSP monthly return data, was
consistent with the overreaction hypothesis. Substantial weak form market
inefficiencies were discovered. (Bondt & Thaler, 1985)
Similarly, Summers (1986) examined the power of statistical tests

commonly used to evaluate the efficiency of speculative markets. The
paper argues that there is no existing evidence that establishes efficient
market. The results concluded that those statistical tests of market
23
Chapter 2
efficiency had very low power. So, the inability of these tests to reject the
hypothesis of efficient market cannot be considered as acceptance of it.
(Summers, 1986).
Summers (1986) challenged the interpretation of the autocorrelation

of short horizon returns by Fama (1970). He argued that the mean-reverting
component of short horizon returns is of no consequence, but mere
variation in returns. Usually, the mean-reversion implies stationarity and
no autocorrelation. Fama and French (1988) answered the challenge and
stated that, a mean-reverting component of stock prices is likely to create
autocorrelation in returns. For that, he examined autocorrelations of stock
returns for increasing holding periods. The data used were one month
returns for all New York Stock Exchange (NYSE) stocks for the period
between 1926 and 1985 collected from the Center for Research in Security
Prices. In their study, when market efficiency tests were conducted, it was
revealed that there is weak autocorrelation for the daily and weekly holding
periods while it is stronger for long term returns. As far as predictability of
returns is considered, they inferred that, returns are more predictable for
portfolios of large firms.
Though randomness in security prices and efficient market hypothesis

were gaining strong evidences and support, they were questioned by many
authors from its very beginning simultaneously. Lo and Mckinlay (1988),
were among the significant contributions towards establishing non-random
walk among the security prices. Keim (1986) and Fama (1988) had uncovered
empirical evidence on the predictable components of stock returns. The
presence of predictable components implies that there exists no random
24
walk. Through their paper, Lo and Mckinlay (1988) contributes further

evidence that the stock prices do not follow random walk. They tested the
random walk hypothesis for weekly stock market returns by comparing
variance estimators derived from data sampled at different frequencies.
Such a comparison is made quatitatively along the lines of Hausman (1978)
specification test. Using the result that under the null hypothesis of no
misspecification an asymptotically efficient estimator must have zero
asymptotic covariance with its difference from a consistent but
asymptotically inefficient estimator, specification tests are devised for a
number of model specifications in econometrics (Hausman, 1978).
Deriving a specification test for both homoscedastic and heteroscedastic
random walks, they found that the rejections of random walk were
extensively documented for weekly returns indexes, size-sorted portfolios,
and individual securities for the entire sample period of 1962 to 1985 and
for all sub periods. However, these rejections were not completely
explained by the infrequent trading or time varying volatility as envisaged.
Ho and Michaely (1988) analysed the optimal individual behaviour

in acquiring information and to determine the amount of information
incorporated in a stock at equilibrium, in the presence of a cost schedule in
acquiring information using a noisy rational expectation model. They
suggested that the prices of small stocks may not incorporate all publicly
available information. Furthermore, they proved that the degree of market
informational efficiency do not depend on investors' expectations and the
risk of the asset return, but crucially on the cost structure of acquiring
information (Ho & Michaely, 1988).
25
Chapter 2
Connolly (1989) examined the robustness of the day-of-the-week

(DOW) and weekend effects to alternative estimation and testing
procedures. It was another attempt towards testing the efficient market
hypothesis. The results of the paper indicated that the strength of the DOW
and weekend effect evidence appeared to depend on the estimation and
testing method. And also, both the effects seemed to have disappeared by
1975, as per his observation.
Clarke et al. (1989) developed a model in which the market timer in

the model chooses between cash (e.g., Treasury bills) and stocks (e.g., the
S&P 500), aiming to invest in the one with the highest return. For the
purpose of simplification, it was assumed that a GNP number is the only
variable that contains information about future stock returns. The
interesting result of his study was that, a market timer without information
acted as a buy- and-hold stock investor. The reason can be attributed to the
fact that, while, on average, stocks outperformed cash in 66 per cent of all
years under the selected period, a market timer with no information can be
expected to hold the winning asset in 66 per cent of all years.
Another study testing weak form efficiency of market was done by

Ekechi (1989) based on Nigeria. He examined the random or non-random
behavior of stock market prices on the Nigerian Stock Exchange. The data
set for the study consisted of individual stock price observations from
January 2, 1980 to June 30, 1986. This yielded 1512 trading days on NSE.
Serial correlations and run tests were used to ascertain whether there were
any dependencies in successive values of log price differences. The results
provided evidence of successive stock price differences in the stock traded
26
in the NSE. Moreover, run tests demonstrated much higher than expected
percentage variations and the relation coefficients were consistently higher
than expected. He concluded that, in overall, the NSE stocks appeared to
deviate from a random walk (Ekechi, Weak-Form Efficiency In The Nigerian
Stock Exchange, 1989).
Various kinds of effects on stock prices signaling market inefficiencies

have been noticed and studied by various authors during the eighties. An
attempt to study the errors recorded in the security prices and the turn-of-
the-year effect was made by Thomson (1989). Errors in recorded security
prices are a source of misspecification in the market model. The turn-of-
the-year (TOY) effect or January effect refers to the anomalous behaviour
of stock returns during the last five trading days in December and the first
five trading days in January. For studying the same, he took a sample
consisting of daily stock returns of all firms listed on the CRSP daily returns
file from July 1962 to December 1986. Through the paper his argument
was that, tax-induced flow-supply pressures cause end-of-the-year recorded
price errors to become non-random enough to create the appearance of
anomalous turn-of-the-year stock return behaviour (Thomson, 1989).
Another notable study regarding the effects was made by Zarowin

(1990). His intention was to study the size, seasonality, and stock market
overreaction. For that, he reexamined De Bondt and Thaler's evidence on
stock market overreaction, in the light of recent findings relating the
overreaction phenomenon to the well-documented size phenomenon. He
concluded that the tendency for losers to outperform winners was not due
to investor overreaction, but due to the tendency for losers to be smaller-
27
Chapter 2
sized firms than winners. When losers were compared to winners of equal
size, there was little evidence of any return discrepancy and also, in periods
when winners were smaller than losers, winners outperformed losers. Thus,
his study confirmed the winner versus loser phenomenon which was found
by DeBondt and Thaler appeared to be another manifestation of the size
phenomenon in finance (Zarowin, 1990).
Thereafter, Peterson (1990) made a study on stock return seasonalities

and earnings information, as an addition to the existing evidence of
seasonality in stock returns. Employing all New York and American Stock
Exchange firms over six years, this study examined the seasonality of
stock, from July 1, 1980, to June 30, 1986. Employing six years of data, he
studied four patterns viz. the intra-quarter effect, the intra-month effect, the
January effect, and the day-of-the-week effect. The results pointed out that,
in general, return seasonals over the reporting periods tended to be similar
to or weaker than returns seasonals over the non-reporting periods.
Therefore, it was inferred that, it was not likely that earnings information
seasonality was the primary cause of stock index return seasonalities
(Peterson, 1990).
While continuous deliberations were made by several authors

regarding the market efficiency and seasonalities, Fama (1992) came with
a detailed examination on to the cross section of expected returns of
selected companies. He evaluated the joint roles of market beta, size,
earnings price ratio, leverage, and book-to-market equity in the cross-
section of average returns on NYSE, AMEX, and NASDAQ stocks. He
concluded that for the 1963-1990 period, size and book-to-market equity
28
capture the cross-sectional variation in average stock returns associated

with size, earnings price ratio, book-to-market equity, and leverage (Fama,
1991).
In the mean time, Sentana and Wadhwani (1992) made a vital

contribution to the field by studying the feedback traders and stock return
autocorrelations with a strong evidence of a century of daily data. They
used both hourly data around the period of the October I987 crash and daily
data for I885-I988. They used alternative measures of volatility based on a
standard GARCH specification, an exponential GARCH model (EGARCH),
and, also, on non-parametric methods. The results pointed out that, when
volatility was low, stock returns at short horizons exhibited Positive serial
correlation. When volatility was rather high, returns exhibited negative
autocorrelation. This time-varying nature of the serial correlation pattern
appeared to be robust across different periods and different measures of
volatility (Sentana & Wadhwani, 1992).
A study on the Bombay Stock Exchange was made by Ignatius (1992)

by stressing on the seasonalities and investment opportunities. He examined
the relationship of stock return patterns on the Bombay Stock Exchange
(BSE) with those of the New York Stock Exchange (NYSE). For that, he
made use of daily data of the BSE and S & P 500 Indexes for the period
1979 to 1990 with 2255 observations. While analysing the results, it was
noted that, the BSE exhibited seasonalities in stock return patterns, with
December providing the highest mean monthly return and fourth week had
the highest mean weekly return. A weak form of the weekend effect was
also noted (Ignatius, 1992).
29
Chapter 2
Studies on seasonalities and effects on stock returns continued to be

the interest of people. For the same reason, authors continued their studies
on it. Kim and Park (1994) made such a move by putting forward further
evidence on the holiday effects in stock returns. For that, the daily market
returns for the NYSE, AMEX, NASDAQ, NYSE AMEX, and S&P 500
were obtained from the CRSP Index Files by them. In order to investigate
the international persistence of the holiday effect, the index returns in U.K.
and Japanese stock markets were also examined. The analysis of data
reported abnormally high returns on the trading before holidays in all three
of the major stock market in the U.S. (the NYSE, AMEX, and NASDAQ).
It was noted that, the holiday effect was also present in the U.K. and
Japanese stock markets, despite each country having different holidays and
institutional arrangements. Moreover, the authors highlight that the holiday
effects in the U.K. and Japanese stock markets were independent of holiday
effect in the U.S. stock market. Unlike the other seasonal patterns in stock
returns like January and weekend effects, the current investigation of size
decile portfolios showed that the size effect was not present in the mean
returns on pre-holidays (Kim & Park, 1994).
Sloan (1996) conducted a test as to whether the stock prices fully

reflect information on earnings or not, based on the accruals and cash flows
of future earnings. For that, he collected a final sample of 40,679 firm-year
observations with the required financial statement and stock price data. In
his study, stock prices were found to act as if investors "fixate" on earnings,
failing to reflect fully information contained in the accrual and cash flow
components of current earnings until that information impacts future
earnings (Sloan, 1996).
30
Another study on holiday anomalies was made by Brockman and

Michayluk (1997) with a specific investigation in to firm size versus share
price effects. The data set used for the study consisted of Center for
Research in Security (CRSP) daily prices, number of shares outstanding,
and returns for all stocks NYSE and AMEX from 1963 to 1994 and all
stocks traded on the Nasdaq from 1994. The significant conclusions they
made out of their study included the fact that, share price was at least as
significant size in explaining the behaviour of stock returns immediately
before and after holidays. And also, even though the returns data including
all holidays displayed somewhat ambiguous price versus size effects, the
returns data corrected for weekend and January effects displayed stronger
role for a share price effect (Brockman & Michayluk, 1997).
A vital and widely discussed work during that period was by Malkiel
(1999) through his book on random walk down the Wall Street. He
redefined the concept of random walk in more clear and precise terms. In
his words, a random walk is one in which future steps or directions cannot
be predicted on the basis of past actions. When the term is applied to the
stock market, it means that short-run changes in stock prices cannot be
predicted. It was in this book that he pointed out his famous words: “On
Wall Street, the term "random walk" is an obscenity. Taken to its logical
extreme, it means that a blindfolded monkey throwing darts at a
newspaper's financial pages could select a portfolio that would do just as
well as one carefully selected by the experts.” (Malkeil, 1999)
At that time, Olowe (1999) came up with further evidence on the

weak form of efficiency in the Nigerian stock market. Analysis of the stock
31
Chapter 2
market was made using correlation analysis of monthly stock returns data
over the period from January 1981 to December 1992. After the analysis,
it was inferred that the Nigerian stock market appeared to be efficient in
the weak form (Olowe, 1999).
Studies based on various countries for testing market efficiency under

varying circumstances were made by authors of various countries at that
time in a widespread manner. Husain and Forbes (1999) studied the case of
Pakistan to test the efficiency in a thinly traded market. They examined
weak form efficiency through serial dependence in stock returns. The data
for the study consisted of 36 individual stocks, 8 sector indices and the
general market index, covering the period from January 1, 1989 to
December 30, 1993 (Husain & Forbes, Efficiency In A Thinly Traded
Market: The Case Of Pakistan, 1999). They found that, the Pakistan stock
market showed serial dependence which was strong, in general. However
the extent of the dependence varied between the indices and the individual
stocks. The indices showed higher serial dependence when compared to the
individual stocks.
It was at that time that Kraizberg and Kellman (1999) attempted to

study the U-Shape autocorrelation pattern in international stock markets.
The data utilised in this study were continuously compounded monthly
returns of twenty stock market indices, each of which were expressed in
terms of its own domestic currency. The data, obtained from monthly tapes
of the International Monetary Fund's International Financial Statistics,
include stock market indices for twenty countries, for the period from 1980
to 1988 (Kraizberg & Kellman, 1999). They were able to detect that these
32
U-shaped autocorrelation patters were found in many international stock

markets. Such curves gave an implication that there were opportunities to
gain above normal returns. This fact was tested and demonstrated by them
in detail.
Not only for weak form efficiency tests, but also attempts for semi-
strong form efficiency tests were made by authors. One such attempt was
made by Syed Ali, Mustafa and Zaman (2001). The data on information
was collected on daily basis from the headlines of front-page news of Daily
Dawn and Business Recorder. The length of data period was from July 01,
1998 to December 31, 2000. In total, 15772 news headlines were collected
by them, in which 10510 were taken from Business Recorder and 5262
from Dawn (Ali, Mustafa, & Zaman, 2001). They concluded that, public
information does not play as important role in day to day variation in stock
returns like the role played by private information and non- informational
reasons in the case of Karachi Stock Exchange. Moreover, private
information was used to denote all non-public information like insider
information and also the information generated by the process of trade
itself.
Osei (2002) studied the asset pricing and information efficiency of

the ghana stock market. The assessment of the market response to information
was done by measuring abnormal returns over a 17-week event window
when the annual earnings information is released. Analysis of cumulative
abnormal returns (CAR) was also carried out (Osei, 2002). The study
established that the market continued drifting up or down beyond the
announcement week, i.e., week zero. This was inconsistent with the efficient
33
Chapter 2
market hypothesis (EMH). The conclusion was that the Ghana Stock
Market was inefficient with respect to annual earnings information releases
by the companies listed on the exchange.
It was then that Demirer and Karan (2002) conducted an investigation

of the day-of-the-week effect on stock returns in Turkey. They examined
evidence for the possible existence of the "daily effect" in the Istanbul
Stock Exchange (ISE).In addition to ISE daily closing index returns, excess
index returns over the risk-free rate overnight interest rates in this case and
inflation were analysed (Demirer & Karan, 2002). The inference was that,
the Turkish market appeared efficient in terms of expected returns.
However, it seemed inefficient in terms of expected variability of these
returns and in terms of investors' expectations.
While considering the efficiency of African markets, the work of

Simons and Laryea (2005) can be noted as a significant one. To study the
efficiency of African market, they employed various tests to investigate the
weak form of the efficient market hypothesis for four African stock markets
– Ghana, Mauritius, Egypt and South Africa. The results of both parametric
and nonparametric tests showed that the South African stock market was
weak form efficient, whereas that of Ghana, Mauritius and Egypt were
weak form inefficient (Simons & Laryea, 2005).
Chakraborty (2006) investigated the stock price behaviour in Sri

Lanka using daily closing prices of Milanka Price Index and twenty five
individual companies underlying the index. Her work was on the validity
of random walk hypothesis in the Colombo Stock Exchange, Sri Lanka. A
battery of tests, viz., unit root test, serial correlation test, runs test, Lo-
34
MacKinlay variance ratio test as well as Chow-Denning's multiple variance

ratio test were applied for analysis. The results of the rest of the tests
(except unit root test) suggested dependency of the aggregate market return
series, which violates the assumption of random walk hypothesis. The unit
root tests provided evidence in favor of stationarity of return series
(Chakraborty, 2006).
In India also, studies to test market efficiency began to rise. A study

for testing weak form efficiency for Indian stock markets was made by
Ahmad, Ashraf and Ahmed (2006), where they attempted to seek evidence
for the weak form efficient market hypothesis using the daily data for stock
indices of the National Stock Exchange, Nifty, and the Bombay Stock
Exchange, Sensex, for the period of 1999 to 2004 (Ahmad, Ashraf, &
Ahmed, 2006). The random walk hypothesis for the Nifty and the Sensex
stock indices was rejected. Both the stock markets had become relatively
more inefficient in the recent periods, and had high and increasing
volatility. Non-parametric tests also indicated that the distribution of the
underlying variables was not normal and the deviation from normality had
become higher in recent years. Both the indices showed a negative
autocorrelation at lag 2, indicating over-reaction one day after information
arrival, followed by a correction on the next day.
During that time, Hassan, Haque and Lawrence (2006) made an

empirical analysis of emerging stock markets of Europe. For that, they
examined several aspects of the seven stock markets in Europe classified
by the International Finance Corporation (IFC) as emerging markets.
Specifically, investigate correlations among the European emerging
35
Chapter 2
markets as well the U.S. and U.K. equity markets. In addition, they tested
for market efficiency and autocorrelation. Using weekly stock market data
from the IFC, findings indicated the greatest potential diversification benefits
from a portfolio containing equities from Slovakia, Turkey, and the U.S.
Further, the returns for Greece, Slovakia, and Turkey were unstable over time.
Based on the results, they came to a conclusion that European emerging
markets, in overall, were unpredictable. Finally, results showed evidence
of autocorrelation in European emerging markets (Hassan, Haque, &
Lawrence, 2006).
Bohl and Reitz (2006) conducted a study to test whether positive

feedback traders act in Germany's Neuer Markt or not. For the study they
selected a sample of daily data of the Nemax 50 and the Nemax-All-Share
index for the period from January 2, 1998 to December 30, 2002. through
this paper, they provided the first empirical evidence on the importance of
positive feedback trading for the return behaviour in Germany's stock
market segment for stocks of young, growth-oriented firms, the so-called
Neuer Markt. Relying on the theoretical models of Shiller, Sentana, and
Wadhwani, they exploited the link between index return autocorrelation
and volatility to receive deeper insight into the return characteristics
generated by traders adhering to positive feedback trading strategy.
Empirical evidence showed that positive feedback traders were present in
Germany's Neuer Markt and thereby induced negative return autocorrelation
during the periods of high volatility (Bohl & Reitz, 2006).
An important work on an examination in to the random walk model

in the Chinese stock market was made by Balsara, Chen and Zheng (2007)
36
and they analysed the technical trading rules prevailed also. They analysed
the index of daily stock prices for all class A and class B shares trading on
both the Shanghai and Shenzhen stock exchanges. Using the variance ratio
test, they rejected the random walk null hypothesis for class A and class B
stock market indexes traded on the Shanghai and Shenzhen stock
exchanges. Consistent with this result, the ARIMA forecasting model
generated more accurate forecasts as compared to the naïve model based
on the random walk assumption (Balsara, Chen, & Zheng, 2007).
Empirical evidence regarding the efficiency of stock markets of

South Asian region was brought by Cooray and Wickremasinghe (2007)
through their paper. They examined the efficiency in the stock markets of
India, Sri Lanka, Pakistan and Bangladesh. The important tests employed
for evaluating weak form stock market efficiency were the Augmented
Dickey Fuller (ADF-1979, 1981) tests, the Phillips-Perron (PP) test, Dicky-
Fuller Generalized Least Square (DF-GLS-1996) test and Elliot-Rothenberg-
Stock (ERS-1996) tests (Wickremasinghe, 2007). Weak form efficiency
was supported by the classical unit root tests. However, it was not strongly
supported under GLS and ERS tests for Bangladesh. To examine semi-
form efficiency, cointegration and Granger causality tests were used. Semi-
strong form efficiency was not supported, because of the fact that these
tests indicated a high degree of interdependence among the South Asian
stock markets. They expect that the above results had implications on both
domestic and foreign investors in South Asia.
While the discussions on announcement effects and news effects on

stock prices were carrying on worldwide, Kothari, Shu and Wysocki (2009)
37
Chapter 2
tested whether managers withhold bad news or not. For analysis, the final
sample consisted of 7,044 announcements of economically significant
changes in firms' dividends between 1962 and 2004, including 5,803
dividend increases and 1,241 dividend decreases. In order to examine
market reactions to these dividend changes, they calculated the five-day
cumulative abnormal return (CAR) around each announcement date. It was
concluded that, the magnitude of the five-day market reaction to bad news
announcements, such as negative dividend changes and pessimistic
managerial forecasts, exceeded that to good news announcements (Kothari,
Shu, & Wysocki, 2009). Evidence on the stock price reactions to good and
bad news announcements suggested that management, on average, delays
the release of bad news to investors.
Another notable study on market efficiency was made by Peress

(2010). For studying product market competition, insider trading, and stock
market efficiency, he made use of a noisy rational expectations model in
which firms operate under monopolistic competition while their shares
trade in perfectly competitive markets. The final sample for the study
consisted of over 5,000 U.S. firms. It started from all NYSE, Amex, and
NASDAQ-listed securities that are contained in the CRSP-Compustat
Merged database for the period from 1996 to 2005. The study inferred that
trading volume, including trades initiated by insiders, and the information
content of stock prices were higher for firms with more market power
(Peress, 2010).
Indian stock markets were again tested for market efficiency through
the work of Joshi (2012). He intended to study the efficiency level in Indian
38
Stock market and the random walk nature of the stock market by using Run
test for the period from 1st January 2001 to 31st December 2010. The author
considered 6 major indices [BSE 30, BSE 100,200,500, BSE SMALL CAP
and BSE MIDCAP] for the study. The results pointed out the evidence of
the inefficient form of the Indian Stock Market in long run but efficient
form in short term. Thus, the findings support the Random-walk hypothesis
in short duration while in long term it did not (Joshi, 2012).
Thus, studies on market efficiency had been a relevant one then and
now. However, it can be seen that only few studies have been made to study
the Indian stock market when compared with other global markets.
Moreover, recent studies of market efficiency covering last ten to seventeen
years are rarely made.
2.1.2 Volatility in returns
Volatility in stock returns was a matter of concern for investors all

the time. Various studied were conducted for testing and predicting
volatility and its nature. Officer (1973) studied the 1930s high volatility
stressing on leverage effect along with the volatility of industrial production.
Merton (1973) introduced an inter-temporal Capital Asset Pricing Model
(CAPM) giving due consideration to the volatility in the assets. However,
traditional volatility measures assumed constant variance and various
econometric methods were developed based on it. Not only that, but the
volatility econometric models were expecting unconditional variance in
general.
39
Chapter 2
It was then that Engle (1982) introduced a new set of stochastic

processes namely Autoregressive Conditional Heteroscedasticity (ARCH)
processes. These processes have an expected mean of zero, serially
uncorrelated, but variances are non constant and conditional upon the past.
He also developed a regression model for measuring such processes
(Engle R. F., 1982). The ARCH model of Engle assumed the variance to
be conditional upon the past error squares only. Bollerslev (1986)
introduced a more generalized ARCH model where the variance is
conditional upon not only the past errors, but also its own past variances.
This model is called the Generalized Autoregressive Conditional
Heteroscedasticity (GARCH) model. The number of lags to be taken for
errors and variance depends on the series to which the model is applied.
However, pursuing to the principle of parsimony, GARCH (1, 1) model can
fit almost all symmetrical distributions (Bollerslev, 1986).
A symmetric ARCH model assumes that volatility is higher in a

falling market than in rising market, which is mentioned as leverage effect.
But sometimes, asymmetric responses can be viewed as in the work of
Engle and Ng (1993), where they provided a news impact curve with
asymmetric response to good and bad news. Engle (1990) had developed
an Asymmetric GARCH (AGARCH) model. The significant asymmetric
models are Threshold ARCH (TARCH) developed by Zakoian (1994) and
Exponential GARCH (EGARCH) model developed by Nelson (1991).
Nelson (1991) also developed GARCH-M and IGARCH. Glosten et al.
(1993) developed the Threshold GARCH (TGARCH) model. Taylor
(1986) and Schwert (1989) developed Power GARCH (PGARCH) where
the conditional variance is non-linear with the residual squares. All these
40
models were developed in order to capture the volatility in all the varying
possibilities.
Akgiray (1989), in a notable work, intended to study and forecast

conditional heteroscedasticity in time series of stock returns. The data were
obtained from the Center for Research in Security Prices (CRSP) tapes, and
they contained 6,030 daily returns on the CRSP value-weighted and equal-
weighted indices covering the period from January 1963 to December
1986. The significant inferences of the study included the fact that daily
return series exhibited significant levels of second-order dependence, and
they could not be modeled as linear white-noise processes. A reasonable
return generating process was empirically shown to be a first-order
autoregressive process with conditionally heteroscedastic innovations. In
particular, generalized autoregressive conditional heteroscedastic GARCH
(1, 1) processes fitted to data very satisfactorily. And also, the forecasts made
based on the GARCH model were found to be superior (Akgiray, 1989).
One of the most discussed work on stock returns and volatility was
that of Baillie and DeGennaro (1990). Through their study, they examined
the relationship between mean returns on a stock portfolio and its
conditional variance or standard deviation. They used GARCH in the mean
models to jointly estimate the mean and variance processes. They found
that the payment delays were significant determinants of mean stock
returns and also were useful for obtaining more precise estimates of the
conditional variance. The results of the paper, however, showed almost no
evidence of relationship between mean returns on a portfolio of stocks and
the variance or standard deviation of those returns.
41
Chapter 2
Another significant contribution to the literature of volatility was

made by Lamoureux and Lastrapes (1990). They studied heteroskedasticity
in stock return data by analysing both volume and GARCH effects. For the
purpose of analysis, the data set collected comprised of daily return and
volume data for 20 actively traded stocks. The results provided empirical
support for the hypothesis that ARCH was a manifestation of the daily time
dependence in the rate of information arrival to the market for individual
stocks. Thus, this form of heteroskedasticity was an artifact of the arbitrary,
albeit natural, choice of observation frequency. It was also noted that the
ARCH effects vanished when volume was included as an explanatory
variable in the conditional variance equation (Lamoureux & Lastrapes,
1990).
Similarly, Schwert and Seguin (1990) also tested heteroscedasticity

in returns and for studying it, they used predictions of aggregate stock
return variances from daily data to varying monthly variances for
size-ranked portfolios. They proposed and estimated factor model of
heteroskedasticity for portfolio returns. This model implied time-varying
betas. Implications of heteroskedasticity and time-varying betas for tests
asset pricing model (CAPM) were then documented by them. After the
analysis of stock returns, it was concluded that, heteroskedasticity in
stock returns was a pervasive phenomenon. There was a common
"market" factor in the heteroskedasticity of monthly stock returns.
Moreover, the volatility of monthly returns to the size portfolios was
highly related to autoregressive predictions of this market volatility factor
(Schwert & Seguin, 1990).
42
During the same period, another vital study on volatility was

conducted by Hamao, Masulis and Ng (1990). Their intention was to study
correlations in price changes and volatility across international stock
markets. The short-run interdependence of prices and price volatility across
three major international stock markets was studied. Daily opening and
closing prices of major stock indexes for the Tokyo, London, and New
York stock markets were examined for that. The analysis utilized the
autoregressive conditionally heteroskedastic (ARCH) family of statistical
models to explore these pricing relationships. They inferred from their
work that daily stock returns measured from close-to-open and open-to-
close can be approximated by a GARCH (1, 1)-M model. For the
conditional variance, they found spillover effects from the U.S. and the
U.K. stock markets to the Japanese market. In their opinion, this effect
showed an intriguing asymmetry. That is, while the volatility spillover
effect on the Japanese market was significant, the spillover effects on the
other two markets were much weaker (Hamao, Masulis, & Ng, 1990).
Bushee and Noe (2000) made a comprehensive study on corporate

disclosure practices, institutional investors, and stock return volatility.
They measured disclosure using the annual ranking of corporate disclosure
practices published by the Association for Investment and Management
Research (AIMR). They also used data set for all firms rated by AIMR
between 1982 and 1996, which results in a sample of 4,314 firm-year
observations for the study. It was found that, firms with higher AIMR
disclosure rankings had greater institutional ownership, but the particular
types of institutional investors attracted to greater disclosure had no net
impact on return volatility. Over and above that, firms with disclosure
43
Chapter 2
ranking improvements resulting in higher transient ownership were found

to experience subsequent increases in stock return volatility (Bushee &
Noe, 2000).
Studies on estimating future stock return volatility were also

attempted by the authors of varying times. Athanassakos and Kalimipalli
(2003) were among them to analyse future stock return volatility. Their
exact study was on analyst forecast dispersion and future stock return
volatility. They examined the relationship between analysts’ forecast
dispersion and future stock return volatility using monthly data for a cross
section of 160 U.S. firms from 1981 to 1996. The conclusion stressed on a
strong and positive relationship between analysts’ forecast dispersion and
future return volatility. Even after accounting for market volatility, the
dispersion measure was found to have incremental information content
(Athanassakos & Kalimipalli, 2003).
Thereafter, a notable work on stock returns and volatility can be said

as by Dennis, Mayhew and Stivers (2006). They were able to examine both
implied volatility innovations and asymmetric volatility phenomenon. In
more detail, they studied the time series of daily stock returns and option-
derived implied volatilities for the S&P 100 index and 50 large U.S. firms
for the period from January 4, 1988, to December 31, 1995. By simultaneously
analysing daily innovations in both index- and firm-level implied volatilities,
they distinguished between innovations in systematic and idiosyncratic
volatility in an effort to better understand the asymmetric volatility
phenomenon. Results indicated that the relation between stock returns
and innovations in systematic volatility or idiosyncratic volatility was
44
substantially negative or near zero. The implication they made based on the
results was that asymmetric volatility was primarily attributed to systematic
market-wide factors rather than aggregated firm-level effects. They also
presented evidence supporting assumption that innovations in implied
volatility were good proxies for innovations in expected stock volatility
(Dennis, Mayhew, & Stivers, 2006).
In the same period, Uppal and Mangla (2006) made an effort to

compare the BSE and Karachi stock exchange (KSE) in terms of market
volatility, manipulation and regulatory response. For that purpose, variance
of the residuals from the GARCH-M model in the before and after sub-
periods was tested for equality by employing the usual F-test. Results of
their work indicated that while the Indian regulatory agencies to have
achieved their objectives in curtailing manipulative and speculative
behaviour, there seemed to be little impact on such behaviour in the case
of KSE. Though there were commonalities in terms of civil code and
cultural and business environments in the two countries, they noted
significant differences in the regulatory effectiveness and industry structure
that may explain the difference in the behaviour outcomes following
regulatory interventions (Uppal & Mangla, 2006).
Volatility was studied in a long run perspective by Karmakar (2006).

Volatility was analysed using the combined data set of the Economic Times
Index and the S&P CNX Nifty together for a long period of time from 1961
to 2005. He estimated volatility by using the ARCH class of models. The
analysis depicted strong evidence of time varying volatility. He also
inferred that periods of high and low volatility tended to cluster. And also,
45
Chapter 2
volatility showed high persistence and was predictable (Karmakar, 2006).

The TARCH model was also used to test the asymmetric volatility effect
and the result suggested the asymmetry in volatility.
Another notable study was made on behaviour of stock return

volatility in India under sub-prime crisis context. The work was done by
Sah (2011). In his research paper, daily data from 1st April 2007 to 31st
July 2010 on S&P CNX Nifty was used for analysis. Moreover, he also
made use of ARCH and GARCH framework for studying behaviour of
volatility of Indian stock market. Threshold GARCH for describing
asymmetric properties of stock return volatility was also utilised. Sah
found that the Indian stock market, represented by S&P CNX Nifty, was
characterised by persistent volatility and leverage effect using benchmark
GARCH, T-GARCH and component GARCH models. The results of
component GARCH model established that there was high persistence of
permanent component and there was also evidence of slower mean
reversion in the long-run (Sah, 2011).
Studies on volatility were conducted in various countries contributing

significant insights to the literature. Bartram, Brown and Stulz (2012) were
curious on why US stocks were more volatile and hence they made a
paper on it. For analysis, the final data set contained 1,97,299 firm-year
observations representing 50 countries. They found that, U.S. stocks were
more volatile than stocks of similar foreign firms. In their point of view,
the volatility of U.S. firms was higher mostly because of good volatility.
Specifically, stock volatility was higher in the United States because it
increased with investor protection, stock market development, new patents,
46
and firm-level investment in Research and Development (Bartram, Brown, &

Stulz, 2012).
Bartram et al. (2012) were curious on why US stocks were more

volatile and they found that, U.S. stocks were more volatile than stocks of
similar foreign firms. In their point of view, the volatility of U.S. firms was
higher mostly because of good volatility.
Wang and Wu (2012) forecasted the energy market volatility using

univariate and multivariate GARCH models. For individual assets, they
found that, multivariate GARCH models performed well whereas for
asymmetric effects, univariate models showed better results.
Lim and Sek (2013) employed both symmetric and asymmetric

GARCH to analyze the volatility of the Malaysian market. They inferred
that, for normal period, symmetric GARCH model performed better while
in crisis period, asymmetric GARCH model performed better.
The research thesis of Nalina (2014) was an exploratory study of

stock market volatility based on secondary data and application of
quantitative techniques to analyse stock market volatility. Through the
work, she tried to fill the gap in the field by characterising the historical
movement in aggregate as well as disaggregate volatility of Indian Stock
Market. To determine whether Indian Stock Market is characterised by
high volatility, French, Schwert and Stambaugh (1987) and Schwert
(1989) model were used by the author and calculated monthly standard
deviation of stock return as a measure of volatility. The methodology
suggested by Campbell et al. (2001) was used to analyse disaggregated
47
Chapter 2
volatility measures for Indian Stock Exchange by the author (Nalina,

2014).
Zhang and Jeffry (2015) studied the volatility spillover between

Mainland China and Hong Kong stock market and the effects of global
financial crisis on it. They concluded that there existed a bi-directional
volatility spillover between the stock markets and the global crisis has
definitely increased the volatility spillover.
A recent significant work on forecasting stock return volatility was

by Tamilselvan and Vali (2016). Their effort was to forecast the stock
market volatility of four actively trading indices from Muscat security
market by using daily observations of indices over the period of January
2001 to November 2015 using GARCH (1,1), EGARCH (1,1) and
TGARCH (1,1) models. The study revealed the positive relationship
between risk and return. The analysis exhibited that the volatility shocks
were quite persistent. Further the asymmetric GARCH models
found significant evidence of asymmetry in stock returns. The study
disclosed inferences that the volatility was highly persistent, and there
existed asymmetrical relationship between return shocks and volatility
adjustments. Moreover, the leverage effect was found across all flour
indices. Hence the investors were advised to formulate investment
strategies by analysing recent and historical news and forecast the future
market movement while selecting portfolio for efficient management of
financial risks to reap benefit in the stock market (Tamilselvan & Vali,
2016).
48
Moriera and Muir (2017) were concerned about the portfolio than the
stock investment directly and they claim that the volatility- managed
portfolios increases Sharpe ratio, and provide much gains to the investors.
Equity volatility has been analyzed with various possibilities by

several authors. One among such study is made by Carvahlo (2018), where
he put forward evidence that financial constraints is a significant determinant
of equity volatility (Carvalho, 2018).
Seoane (2019) studied the relationship between the time varying

volatility and the sovereign risk premium. He found a positive correlation
between the sovereign income and the volatility after studying a number of
European economies during debt crisis. In a latest study of Bollerslev et al.
(2019), a new factor based estimator for high dimensional and multivariate
volatility is introduced. The authors claim that their estimator has financial
applications in portfolio allocation, risk management, asset pricing, and
hedging.
There were several attempts to capture the volatility in the BRICS

nations by the academicians. One of the notable works includes that of
Kishor and Singh (2014), which studied the stock return volatility
relationship between the BRICS nations and it was found that the stock
markets, except Brazil and Chinese, were significantly influenced by news
of US stock market. Hunzinger, Labuschagne and Boetticher (2014)
examined and compared the volatility skewness of the BRICS nations. An
investigation in to the relation between the BRICS stock market and
commodity futures market was made by Kang, McIver and Yoon (2016)
using the Fractionally Integrated Asymmetric Power Autoregressive
49
Chapter 2
Conditional Heteroskedasticity (FIAPARCH) model. A wavelet analysis of

mean and volatility spillovers between the oil and the BRICS stock market
was conducted by Boubaker and Raza (2017).
Thus, volatility has been studied and predicted to arrive at various

investment decisions and to arrive at conclusions on economies. Various
volatility models were fitted by the academicians all over the world to
determine the most apt one for volatility analysis. However, there is no
single model that can be said as apt for all stock markets or all economies.
It depends on the market on which the study is being conducted.
2.1.3 Linearity in returns

An important assumption regarding the stock prices are that they are
linearly related. It is a significant behaviour of stock returns. There are
cases where the behaviour of linearity is not maintained. Studies have been
conducted to test linearity in the returns. Hinich and Patterson (1985)
studied the evidence of nonlinearity in daily stock return. They applied a
newly developed statistical technique to time series of daily rates of return
of 15 common stocks. The technique involved estimating the bispectrum
of the observed time series. The bispectrum was defined as the double
Fourier transform of the third order cumulant function. If the process
generating rates of return was linear with independent innovations, then the
skewness of the bispectrum will be constant. Moreover, they described a
test that can detect non constant skewness in the bispectrum. Hence, if the
test rejected constant skewness, a nonlinear process was implied. As a
consequence, the test could distinguish between white noise and purely
random noise. In overall, based on the results, they suggested that daily
50
stock returns were generated by a nonlinear process (Hinich & Patterson,

1985).
An attempt to study the nonlinear predictability of stock market

returns was made by McMillan (2001) based on the evidence from
nonparametric and threshold models. Recent empirical evidence suggested
that stock market returns were predictable from a variety of financial and
macroeconomic variables. However, McMillan pointed out that, with two
exceptions this predictability was based upon a linear functional form. He
extended this research by considering whether a nonlinear relationship
existed between stock market returns and these conditioning variables, and
whether this nonlinearity can be exploited for forecasting improvements.
General nonlinearities were examined using a nonparametric regression
technique that suggested possible threshold behaviour. He reported some
evidence of nonlinear predictability of stock market returns using financial
variables, more specifically interest rates (McMillan, 2001).
Hiremath and Kamaiah (2010) tested non-linear dependence in stock

returns of indices at two premier Indian stock exchanges namely, NSE and
BSE. A set of non-linear tests were applied to examine the behaviour of
stock returns. Strong evidences of non-linear dependences for almost all
index returns of NSE and BSE were found in the study. The results from
windowed Hinich test showed that the reported non-linear dependencies
were not consistent during the whole period suggesting presence of
episodic non-linear dependencies in returns series surrounded by long
periods of pure noise (Hiremath & Kamaiah, Nonlinear Dependence In
Stock Returns: Evidences From India, 2010).
51
Chapter 2
As far as Indian stock market is considered, there are only fewer

studies covering the linearity in the stock returns. The linearity aspect,
being an important behavioural characteristic, is not studied as wide as
other behavioural aspects. There have not been much studies covering the
latest years of data of Indian stock market.
2.1.4 Normality in returns

Normality is a significant assumption for a time series data. There are
also certain cases where normality will not be present. Especially in the
case of financial time series like stock prices, it is common to find non-
normal distributions. Several works have been done by experts on the
normality in stock prices or returns. The study of Singleton and Wingender
(1986) is one of such important studies. They wanted to study the skewness
persistence in common stock returns. For that purpose, they collected a
time series of monthly return data from the CRSP file for the twenty-year
period 1961-1980. Only continuously listed securites for each five and ten year
sub period under investigation were considered. Since the measurement of
skewness was sensitive to the differencing interval, they used monthly,
semi-annual, and annual returns in their tests. The first set of tests for
skewness persistence involved individual securities and fx3 (the third
central moment divided by the cube of the standard deviation). A security
was considered skewed if its µ3 exceeded +0.3.
When analysed, the frequency of positive skewness in the study was

found to be relatively stable over varying time periods from 1961 to 1980.
However, the skewness of individual stocks and portfolios of stocks did not
persist across different time periods. Positively- skewed equity portfolios
52
in one period were not likely to be positively skewed in the next time
period. Past positively-skewed returns did not predict future positively-
skewed returns. It was also noted that the lack of persistence did not
invalidate three-moment equilibrium models, and it did mean that portfolio
management strategies based on selecting stocks were likely to fail
(Singleton & Wingender, 1986).
Bai and Ng (2005) contributed another distinguished work where the

authors tested the skewness, kurtosis, and normality for time series data.
For testing normality, they developed tests for skewness, kurtosis, and a
joint test of normality suited for time series observations. They applied their
tests to 21 macroeconomic time series. For assessing the size and the power
of the tests, they used Monte Carlo simulations. And the Monte Carlo
simulations showed that the test statistics for symmetry and normality had
good finite sample size and power. In finite samples, the test for kurtosis
had poor size. However, the difficulty in estimating kurtosis did not pose a
size problem for normality tests. In their opinion, combining the co
efficient of skewness with kurtosis as done by Bera and Jarque was still
useful for time series data, once the limiting variance takes into account
serial correlation in the data. Nonetheless, the primary source of power in
the test for normality could be derived from the test for skewness (Bai &
Ng, 2005).
Lau, Wingender and Lau (1989) attempted to estimate skewness in

the stock returns through their paper. They pointed out the universal neglect
in the finance literature of skewness' sampling error and its significant
consequences and presented a simple approach for roughly constructing a
53
Chapter 2
confidence interval for skewness estimated from lognormal populations. In

addition to it, they also pointed out directions of further research for
developing a comprehensive approach for estimating skewness in a reliable
manner. The numerical results of their work indicated that, in order to
obtain reasonably accurate estimates on skewness, the sample size must be
in the thousands (Lau, Wingender, & Lau, 1989).
In general, stock prices and returns are found to be non normal. It is

because of the peculiarity of stock returns. It is common to find financial
time series like stock returns to be non normal even though it is expected
to be normal. Thus, normality in stock returns is an important behaviour to
be analysed especially in active stock market like India.
2.1.5 Overall return behaviour

Several attempts are made in the literature to study the overall stock
return behaviour among various countries. The noted work of McEnally
(1974) was such an attempt. He intended to study the return behaviour of
high risk common stocks. For analysis, 545 common stocks were randomly
selected from among the 549 common stocks which were continuously
listed on the New York Stock Exchange throughout the period of 1945 to
1965. It was frequently observed that, high risk common stocks did not
appear to generate returns commensurate with the level of their associated
risk (McEnally, 1974).
Hsu (1984) conducted a study to understand the stock return

behaviour of US stocks. He wanted to check whether the behaviour was
stationary or evolutionary. He reported additional empirical evidence based
on robust statistical procedures to illuminate the evolutionary nature of
54
return variability and systematic risk, and to examine how the evolution is
related to shifting market environments. He showed various examples of
shift in market return and found that stock market risk is not stationary, but
evolutionary (Hsu, 1984).
A comparison of various models of stock return was done by Kon

(1984) through his paper. For that, he estimated the parameters of the
respective models for mixtures of N = 1, 2, 3, 4, and 5 normal distributions.
Discrete mixture of normal distributions was proposed to explain the
observed significant kurtosis (fat tails) and significant positive skewness in
the distribution of daily rates of returns for a sample of common stocks and
indexes. Stationarity tests on the parameter estimates of this discrete
mixture of normal distributions model revealed significant differences in
the mean estimates that can explain the observed skewness and also
significant differences in the variance estimates that can explain the
observed kurtosis (Kon, 1984).
Return behaviour in emerging stock markets were studied by Claessens,

Dasgupta and Glen (1995). They investigated the behaviour of stock returns
in the twenty stock markets represented in the International Finance
Corporation's Emerging Markets Data Base (EMDB). And, the stock price
behaviour in the twenty stock markets represented in the IFC'S EMDB
displayed few of the anomalies found for industrial economies. In particular,
there was limited evidence of turn-of-the-tax-year effects, of small-firm
effects, or of a relation between seasonal effects and size effects. However,
they did find a significant predictability of returns that did not appear to be
related to size (Claessens, Dasgupta, & Glen, 1995).
55
Chapter 2
Cuthbertson, Hayes and Nitzsche (1997) analysed the behaviour of

UK stock returns based on market efficiency. The VAR methodology of
Campbell and Shiller (I989) was employed under four different assumptions
regarding equilibrium expected returns to assess the efficiency of the UK
stock market. In first model, equilibrium expected returns were assumed to
be constant, while in the second model, excess returns were assumed to be
constant. The next two models assumed that equilibrium returns depended
upon a time-varying risk premium which varied with the conditional
expectation of the return variance (i.e. the CAPM). Over the period of
study, I9I8-93, they clearly rejected efficiency using the VAR metrics
under the null that expected returns are constant, or that they depended only
on a safe rate of interest (Cuthbertson, Hayes, & Nitzsche, 1997).
Robinson (2001) made a study to understand the behaviour in small

emerging market based on the Barbados Stock Exchange (BSE). The data
for the study consisted of the monthly closing prices for the common stocks
of the 18 companies listed on the BSE. He came to a conclusion that the
hypothesis of randomness in the rates of return series was not able to be
rejected for the large majority of stocks listed on the BSE. The results of
the autocorrelations and runs tests for predictability in particular were in
sharp contrast to a number of studies conducted on small, thinly traded
emerging markets, in particular Claessens, Dasgupta and Glen (1993)
comprehensive survey of the major emerging stock markets (Robinson C.
J., Stock Price Behavior In A Small Emerging Market: Tests For
Predictabilityand Seasonality On The Barbados Stock Exchange, 2001).
56
Another move for studying behaviour of returns in small emerging

markets was made by Robinson (2004) by specifically addressing on the
Bahamas International Securities Exchange (BISX). The data for the study
consisted of the daily closing prices for the common stocks of the seventeen
companies listed on the Bisx over the period from January 2 2001 to July
26 2002. The raw data were adjusted for cash dividends, bonus issues, stock
splits and rights issues. The results suggested that unlike a number of other
emerging markets, when one accounts for the non-normality of the stock
returns one cannot reject the hypothesis of randomness in stock returns on
the Bisx.
Again, Robinson (2005) made another study to test for weak form
market efficiency on the Jamaica Stock Exchange (JSE). For that, an
analysis of daily returns on all stocks listed on the JSE over the period
January 2, 1992 December 31, 2002 was performed. Through this paper,
Robinson inferred that, despite being the largest and most active stock
market in the Commonwealth Caribbean, there was strong evidence that
the JSE was not weak form efficient (Robinson J. , Stock Price Behaviour
In Emerging Markets: Tests For Weak Form Marketefficiency On The
Jamaica Stock Exchange, 2005).
While analysing critically the literature regarding the behaviour of

returns, it can be seen that no conclusive generalisation can be made about
the bahaviour for all stocks alike. Some stocks are found to be random
whereas some are not. Some markets show efficiency and some do not.
Also, the studies with different period of study shows different results as
well. The same is the case with volatility in returns and linearity in returns.
57
Chapter 2
To know about a stock’s behaviour, it becomes imperative to analyse and

find it, rather than depending upon the literature. When the literature on the
overall stock return behaviour is analysed, it can be seen that only rare
attempts are made to include more behavioural aspects in the studies.
Sometimes, the studies are limited to one or two behavioural aspects despite
of having the objective to study the overall return behaviour. Moreover,
comprehensive studies covering all behavioural characteristics of Indian
stock market for the recent years are less.
2.2 Stock Return Predictability and Asset Pricing Theories

Based on the behaviour of the returns, many attempts were made by
the experts to predict the stock returns. For that purpose, they have used the
relevant and available asset pricing theories. Thus, the review under this
section can be divided into two namely (i) Predictability in Returns and (ii)
Asset Pricing Theories.
2.2.1 Predictability in returns
Predictability of stock prices or returns had been a problem for

investors of all time. Financial experts have been trying to study whether
the stock returns are predictable or not from the very beginning era of
investment. Several authors had put forward contradictory views about the
predictability of returns. It included those who stressed the stock returns
are predictable and also those who objected the possibility of prediction of
stock returns.
Keim and Stambaugh (1986) made a study on prediction of returns

in the stock and bond markets. They came to a conclusion that several
58
predetermined variables that reflected levels of bond and stock prices

appeared to predict returns on common stocks of firms of various
sizes, long-term bonds of various default risks and default-free bonds of
various maturities. The returns on small-firm stocks and low-grade bonds
were more highly correlated in January than in the rest of the year with
previous levels of asset prices, especially prices of small-firm stocks
(Keim & Stambaugh, Predicting Returns In The Stock And Bond
Markets, 1986).
Evidence of predictable behaviour of security returns was shown by

Jegadeesh (1990) in his paper. He developed a model to examine the serial
correlation properties of returns of individual securities for that purpose.
Through the study, he presented new empirical evidence of predictability
of individual stock returns. The negative first-order serial correlation in
monthly stock returns was highly significant. Furthermore, significant
positive serial correlation was found at longer lags, and the twelve-month
serial correlation was particularly strong. Using the observed systematic
behaviour of stock returns, one-step-ahead return forecasts were made and
ten portfolios were formed from the forecasts (Jegadeesh, 1990).
Regarding regional stock market, whether common predictable

components were there in returns were analysed by Cheung, He and Ng
(1997). They employed recently developed multivariate methods to study
the predictability of international stock market returns. They were able to
find evidence of significant common predictable components within the
Pacific, the European, and the North American stock markets using region-
specific instrumental variables. However, the degree of predictability of
59
Chapter 2
these common movements, varied across regional markets and across sub
periods. Results indicate that only North American instrumental variables
have the ability to predict excess returns on the stock markets in the other
two regions, but not vice versa (Cheung, He, & Ng, 1997).
Thereafter, Pesaran and Timmermann (2000) came up with a

recursive modelling approach for predicting UK stock returns. They
applied an extended and generalised version of the recursive modelling
strategy developed in Pesaran and Timmermann (1995) to the UK stock
market. The focus of the analysis was to simulate investors' search in real
time for a model that can forecast stock returns. The analysis found
evidence of predictability in UK stock returns which could have been
exploited by investors to improve on the risk-return trade-off offered by
a passive strategy in the market portfolio (Pesaran & Timmermann,
2000).
Another notable study on the area was by Cremers (2002) who opted
for Bayesian model selection perspective for predicting stock returns. He
explored the predictability of S&P 500 index excess returns from January
1954 to December 1998, for a total of 540 monthly observations, in a
framework that modeled the time variation in expected returns conditional
on specific factors. Through this paper, he introduced a new methodology
that explicitly accounted for model uncertainty and used economically
meaningful prior information to calibrate the hyper parameters in the prior
distributions (Cremers, 2002).
An effort for evaluating the forecast accuracy of emerging market

stock returns was made by Carvalhal and Mendes (2008). They analysed
60
the forecast performance of emerging market stock returns using

standard autoregressive moving average (ARMA) and more elaborated
autoregressive conditional heteroskedasticity (ARCH) models. Their
results indicated that the ARMA and ARCH specifications generally
outperformed random walk models. Models that allowed for asymmetric
shocks to volatility were found better for in-sample estimation (threshold
autoregressive conditional heteroskedasticity for daily returns and
exponential generalized autoregressive conditional heteroskedasticity for
longer periods), and ARMA models were better for out-of-sample forecasts
(Carvalhal & Mendes, 2008).
In the meantime, prediction of global returns was aimed by

Hjalmarsson (2010) in his paper. For that, he tested for stock return
predictability in the largest and most comprehensive data set analysed so
far, using four common forecasting variables namely the dividend-price
(DP) and earnings price (EP) ratios, the short interest rate, and the term
spread. The data contained over 20,000 monthly observations from
40 international markets, including 24 developed and 16 emerging
economies. The empirical results indicated that the short interest rate and
the term spread were fairly robust predictors of stock returns in developed
markets. In contrast, no strong or consistent evidence of predictability was
found when considered the EP and DP ratios as predictors (Hjalmarsson,
2010).
Stock return predictability being a significant concern for every

nation, only few efforts are made to study the stock returns predictability
61
Chapter 2
on the Indian context. As the future being uncertain, lack of latest studies
on the prediction of stock returns are highly called for.
2.2.2 Asset Pricing Theories
For predicting stock returns, it is inevitable to have the knowledge of

the existing asset pricing theories. CAPM is the most commonly accepted
and discussed asset pricing model. Thus, the review is given prominence to
the literature related to CAPM.
The beginning of asset pricing theories can be rightly attributed to the

work of Markowitz (1952). His work was on portfolio selection. Markowitz
first considered the rule that the investor does (or should) maximise
discounted expected, or anticipated, returns. This rule was rejected both as
a hypothesis to explain, and as a maximum to guide investment behaviour.
He next considered the rule that the investor does (or should) consider
expected return a desirable thing and variance of return an undesirable thing.
This rule had many sound points, both as a maxim for, and hypothesis about,
investment behaviour. Finally he illustrated geometrically relations between
beliefs and choice of portfolio according to the expected returns-variance
of returns rule.
Markowitz rejected the expected returns rule on the grounds that it

never implied the superiority of diversification. The Expected return-
Variance (E-V) of return rule, on the other hand, implied diversification
for a wide range. Not only did the E-V hypothesis implied diversification,
it implied the right kind of diversification for the right reason. The
adequacy of diversification was not thought by investors to depend solely
62
on the number of different securities held. It was necessary to avoid

investing in securities with high covariance among themselves. He
suggested that investor should diversify across industries because firms
in different industries, especially industries with different economic
characteristics, had lower covariance than firms within an industry
(Markowitz, 1952).
Thereafter Sharpe (1963) developed a simplified model for portfolio

analysis. He described the advantages of using a particular model of the
relationships among securities for practical applications of the Markowitz
portfolio analysis technique. He also developed a computer program to take
full advantage of the model. The peculiarity of the model was that 2,000
securities can be analysed at an extremely low cost as little as 2% of that
associated with standard quadratic programming codes. Preliminary
evidence suggested that the relatively few parameters used by the model
can lead to very nearly the same results obtained with much larger sets of
relationships among securities. The possibility of low cost analysis,
coupled with likelihood that a relatively small amount of information need
be sacrificed make the model an attractive candidate for initial practical
applications of the Markowitz technique (Sharpe, A Simplified Model for
Portfolio Analysis, 1963).
It was then that Sharpe (1964) came up with his Nobel Prize winning
work of Capital Asset Pricing Model (CAPM). His intention was to put
forward a theory of market equilibrium under the conditions of risk. No
authors had yet attempted to extend model of investor behaviour to
construct a market equilibrium theory of asset prices under conditions of
63
Chapter 2
risk. So, Sharpe showed that such an extension provides a theory with
implications consistent with the assertions of traditional financial theory.
Moreover, it sheds considerable light on the relationship between the price
of an asset and the various components of its overall risk. For these reasons
it warranted consideration as a model of the determination of capital asset
prices.
Sharpe’s model stated that, in equilibrium there would be a simple

linear relationship between the expected return and standard deviation of
return for efficient combinations of risky assets. There will be a consistent
relationship between their expected returns and what might best be called
systematic risk. With respect to equilibrium conditions in the capital market
as a whole, the theory leads to results consistent with classical doctrine (i.e.,
the capital market line). Sharpe has shown that with regard to capital assets
considered individually, it also yielded implications consistent with
traditional concepts. Because, it was a common practice for investment
counselors to accept a lower expected return from defensive securities
(those which respond little to changes in the economy) than they require
from aggressive securities (which exhibit significant response) (Sharpe,
1964).
In his model, Sharpe had incorporated contributions of Lintner

(1965, 1969) and Mossin (1966) also. Lintner (1965) had contributed to
the formulation of CAPM through his work of the valuation of risk assets
and the selection of risky investments in stock portfolios and capital
budgets. He first dealt with the problem of selecting optimal portfolios by
risk-averse investors. In the next section, Lintner developed various
64
significant equilibrium properties within the risk asset portfolio. Then he

examined the implications of certain capital budgeting decisions. It was
found that, the risk premium is directly related to the variance, than
standard deviation. The optimum portfolio can be determined when shot
sales are permitted or not permitted. In his opinion, there can be no risk
discount rate to be used in computing present values to accept or reject
projects. He stressed that the cost of capital is not the appropriate rate to
use (Lintner, 1965).
An effort to measure portfolio performance was made by Friend and

Blume (1970) through their notable work. They briefly reviewed the theory
of CAPM, including the assumptions on which it was based and discussed
the different one-parameter measures of performance that have been
derived from the theory. He then examined the adequacy of the one-
parameter measures of performance by measuring empirically the
relationship between these measures and the risk from which they were
supposed to abstract. Thereafter, he attempted to explain the apparent
discrepancies between the market line theory and the empirical findings in
terms of specific deficiencies in the underlying assumptions (Friend &
Blume, 1970).
Some empirical tests on CAPM were done by Black, Jensen and

Scholes (1972) in their paper. The data used by them in the tests to be
described were taken from the University of Chicago Center for Research
in Security Prices Monthly Price Relative File, which contained monthly
price, dividend, and adjusted price and dividend information for all
securities listed on the New York Stock Exchange in the period January,
65
Chapter 2
1926 to March, 1966. The risk-free rate was defined as the 30-day rate on
U.S. Treasury Bills for the period from 1948 to 1966. The expected excess
return on an asset was not strictly proportional to its beta. The authors
strongly rejected the traditional form of model. In their opinion, a two
factor model, to a greater extent explains the behaviour of well diversified
portfolios at different levels of beta (Black, Jensen, & Scholes, 1972).
Black (1972) then came up with a work on capital market equilibrium

with restricted borrowing. The author explored the nature of equilibrium
under two assumptions. First, it was assumed that there was no riskless
asset and that no riskless lending or borrowing was allowed. Second, there
was a riskless asset and that long positions were allowed but short positions
were not allowed in the asset. In both cases, he found that the expected
return on any asset was a linear function of its beta, just as it was without
any restrictions or borrowing. He pointed out that if there is a riskless asset,
the slope of line relating to the expected return on a risky asset to its beta
must be smaller than it is when there are no restrictions on borrowing.
Therefore, a model in which borrowing was restricted was consistent with
the empirical findings reported by him (Black F., 1972).
A study for empirically testing risk, return, and equilibrium was done
by Fama and MacBeth (1973). They tested the relationship between
average return and risk for New York Exchange common stocks, based on
two parameter portfolio model. The study was not able to reject the
hypothesis of the models that the stock prices reflected the risk-averse
investors’ attempts to hold portfolios that were efficient. The coefficients
66
and residuals of the risk- return regressions were consistent with the
efficient market (Fama & MacBeth, 1973).
Another attempt for Testing the CAPM with time-varying risks and
returns was made by Bodurtha, Jr. and Mark (1991). They have drawn on
Engle's autoregressive conditionally heteroscedastic modeling strategy to
formulate a conditional CAPM with time-varying risk and expected
returns. The model was estimated by generalised method of moments. They
arrived at a conclusion that a CAPM that allows mean excess returns to
shift in January survives generalised method of moments specification tests
for a number of omitted variables. However, a residual dividend yield
component was found to remain in the excess returns of smaller firms
(Bodurtha, Jr., & Mark, 1991).
Discussion on CAPM and its anomalies were widely carried out by

the experts after the work of Sharpe. Several notable works both
supporting and criticising the model were published thereafter. Ho,
Strange & Piesse (2000) made such an effort whereby they bought
evidence from Hong Kong market for the CAPM anomalies. They
examined empirically the independent and joint roles of the more
commonly hypothesised variables in explaining cross-sectional variation
in average returns over the period from January 1980 to December 1994.
The sample data set contained 117 common stocks traded on the Hong
Kong stock market during the sample period of 180 months. Relevant
market and financial statements data of these sample firms were retrieved
from the Pacific-Basin capital markets databases compiled by the
University of Rhode Island, and were used to compute the variables used
67
Chapter 2
in the tests, namely, market equity (ME), book-to-market equity (BE/ME),

market leverage (A/ME), book leverage (A/BE), dividend yield (DY ), and
earnings-price ratio (E/P).
Their results based on analysis indicated that beta, book leverage,

earnings-price ratio and dividend yield were not priced, whereas
relatively strong book-to-market equity and market leverage effects and
marginally significant size and share price effects were observed. They
infer that the variables that were found to have significant roles in the
pricing of Hong Kong equity stocks, namely, book-to market equity,
market leverage (absorbed by book-to market equity), size, and share
price, might be proxies for certain firm-specific attributes which beta had
failed to capture fully or proxies for certain risks (other than systematic
risk) and costs. They pointed out that if the market was efficient, these
observed anomalies would imply that the CAPM was misspecified and
did not correctly and adequately describe price behaviour in the Hong
Kong stock market and that accordingly the practical usefulness of the
CAPM as an aid to decision making should be much diminished (Ho,
Strange, & Piesse, 2000).
A significant contribution was made by Fama and French (2003) to

the literature the model by critically analysing the theory and evidence of
CAPM. Their working paper reviewed the history of empirical work on the
model and what it said about shortcomings of the CAPM that posed
challenges to be explained by more complicated models. They inferred that
the version of the CAPM due to Sharpe (1964) and Lintner (1965) had
never been an empirical success. They pointed out that, from the first,
68
empirical work on the model consistently found that the relation between
average return and market beta was flatter than predicted by the model.
That is, the risk premium per unit of market beta was lower. And this
problem was serious enough to invalidate most applications of the model
according to them (Fama & French, 2003).
When analysing critically the literature related with predictability of

returns, it can be noted that there are mixed conclusions on the stock return
predictability. Some stocks and stock market in general shows
predictability while some do not. Over and above that, no model can be
said as conclusive for predicting stock returns in general. Some models are
based on asset pricing theories while some are not. Among the asset pricing
theories, CAPM been a widely discussed topic. Despite of having both
supporting and criticizing views, CAPM continues to stand because of the
ultimate necessity of predicting returns. However, the limitations of the
theory call for newer approaches for pricing stocks exclusively, which are
less in Indian stock market studies.
2.3 Research Gap

The literature points out to the fact that analysis of stock return
behaviour is always a relevant topic that was addressed and need to be
addressed. As the stock market movements are highly fluctuating and
vibrant, studying the behaviour of returns is essentially called for making
investment decisions. The strength and weakness of stock market
investment lies in the fact that the future returns are uncertain. Investment
planning and decision is made on the basis of expectations about the future.
Thus, deciding upon how the stock returns will behave in future depends
69
Chapter 2
on knowing how it behaves now. That is the point where the analysis of
behaviour of returns become relevant always.
The behavioural aspects of stock return of have been studied

separately in an isolated manner by the researchers. In order to get a
complete picture of the behaviour of returns, it is necessary to have a
comprehensive study of stock return behaviour covering the entire
behavioural aspects of returns. Then only valid conclusions on stock
returns and its predictability can be made. Thus, it is necessary to have a
comprehensive study on stock return behaviour of the Indian stock market.
Most importantly, a study prior to pre-recession period covering from
2003-04 to 2019-20 is highly relevant. Moreover, an appropriate model for
predicting the stock returns exclusively is also rare, which is intended
through this study.
2.4 Research Question

The research question addressed through this study is that whether
the equity stock returns in India are predictable or not. It needs to be
addressed based on the current stock market scenario. Before deciding
upon the predictability of returns, how the equity returns behave, is a
question to be answered initially, since the predictability of returns depends
on the behaviour of the returns.
…..…..
70

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2.1 The Behavior of Stock Returns ................................................

In order to enable detail analysis of stock return behavior and predictability

2.1 The Behavior of Stock Returns

the behavioral aspects studied by various researchers, the literature

2.1.1 Randomness in returns and market efficiency

Despite of the fact that Bachelier’s theory remained untouched for

The term random walk was more popularized by Eugene Fama

The validity of independence assumption of Random walk model was

Another significant contribution towards the random walk

Thereafter in 1968, Michael C. analysed the performance of mutual

Smith (1981) tested the information effect of announcement of a new

However, critical evaluation of the randomness in stock market has

Bondt and Thaler (1985), through their paper, attempted to study

Similarly, Summers (1986) examined the power of statistical tests

Summers (1986) challenged the interpretation of the autocorrelation

Though randomness in security prices and efficient market hypothesis

walk. Through their paper, Lo and Mckinlay (1988) contributes further

Ho and Michaely (1988) analysed the optimal individual behaviour

Connolly (1989) examined the robustness of the day-of-the-week

Clarke et al. (1989) developed a model in which the market timer in

Another study testing weak form efficiency of market was done by

Various kinds of effects on stock prices signaling market inefficiencies

Another notable study regarding the effects was made by Zarowin

Thereafter, Peterson (1990) made a study on stock return seasonalities

While continuous deliberations were made by several authors

capture the cross-sectional variation in average stock returns associated

In the mean time, Sentana and Wadhwani (1992) made a vital

A study on the Bombay Stock Exchange was made by Ignatius (1992)

Studies on seasonalities and effects on stock returns continued to be

Sloan (1996) conducted a test as to whether the stock prices fully

Another study on holiday anomalies was made by Brockman and

At that time, Olowe (1999) came up with further evidence on the

Studies based on various countries for testing market efficiency under

It was at that time that Kraizberg and Kellman (1999) attempted to

U-shaped autocorrelation patters were found in many international stock

Osei (2002) studied the asset pricing and information efficiency of

It was then that Demirer and Karan (2002) conducted an investigation

While considering the efficiency of African markets, the work of

Chakraborty (2006) investigated the stock price behaviour in Sri

MacKinlay variance ratio test as well as Chow-Denning's multiple variance

In India also, studies to test market efficiency began to rise. A study

During that time, Hassan, Haque and Lawrence (2006) made an

Bohl and Reitz (2006) conducted a study to test whether positive

An important work on an examination in to the random walk model

Empirical evidence regarding the efficiency of stock markets of

While the discussions on announcement effects and news effects on

Another notable study on market efficiency was made by Peress

2.1.2 Volatility in returns

Volatility in stock returns was a matter of concern for investors all

It was then that Engle (1982) introduced a new set of stochastic

A symmetric ARCH model assumes that volatility is higher in a

Akgiray (1989), in a notable work, intended to study and forecast

Another significant contribution to the literature of volatility was

Similarly, Schwert and Seguin (1990) also tested heteroscedasticity

During the same period, another vital study on volatility was

Bushee and Noe (2000) made a comprehensive study on corporate

ranking improvements resulting in higher transient ownership were found

Studies on estimating future stock return volatility were also