EVIDENCE FOR WEAK FORM EFFICIENCY IN STOCK MARKETS: THE CASE OF COLOMBO STOCK EXCHANGE

Abstract

This paper, understanding the importance of financial market efficiency investigates the weak form efficiency of the Colombo Stock Exchange (CSE) by analyzing returns on the All Share and the Milanka Price Indices over the period 1985 to 2009. Tests are also conducted for two sub periods, the pre 2000 period and post 2000 period. Weak form efficiency is tested using the random walk hypothesis, subjecting both return indices on a daily as well as a monthly basis, using several techniques. Daily return results prove that the market is weak form inefficient. However in the latter sub period, inefficiency levels have dropped. In monthly returns, tests state that the market is inefficient in the pre 2000 period and efficient in the post 2000 period. The study also attempts to identify a day-of-the-week effect and a month-of-the-year-effect. Here a significant negative Monday effect and a significant positive Friday effect is identified for the post 2000 period. A significant monthly effect is not visible and it could be stated that returns are equal among months, thus claiming efficiency.

Keywords: Weak Form Efficiency; Autocorrelation; Random Walk; Day of the Week Effect; Month of the Year effect

For full paper: fmscresearch@sjp.ac.lk