Empirical Testing of Strong Form of Market Efficiency

Abstract

The majority of efficient market research to date has focused on developed markets like United States and European securities market. Not much research has been done on strong form of the efficient market hypothesis in developing countries markets like India. The efficient market hypothesis suggests that stock markets are “information efficient”, i.e., any new information relevant to the market is spontaneously reflected in the stock prices, so nobody can use such information to consistently earn abnormally high returns. This paper shows that the Indian market is strong form efficient to the extent that mutual fund managers could not out perform randomly constructed portfolios of index stocks for the period 2003–2007. This implies that an investor can build his/her own portfolio without any expert guidance and still earn returns comparable to professionally managed funds.