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India is one of the major emerging economies of the world and has witnessed tremendous economic growth over the last decades. The reforms in the financial sector were introduced to infuse energy and vibrancy into the process of economic growth. The Indian stock market now has the largest number of listed companies in the world. The phenomenal growth of the Indian equity market and its growing importance in the economy is indicated by the extent of market capitalization and the increasing integration of the Indian economy with the global economy. Various schools of thought explain the behaviour of stock returns. The Efficient Market Theory is the most important theory of the School of Neoclassical Finance based on rational expectation and no-trade argument. The book investigates the growth and efficiency of the Indian stock market in the theoretical framework of the Efficiency Market Hypothesis (EMH). The main objective of the present study is to examine the returns behaviour in the Indian equity market in the changed market environment. A detailed and rigorous analysis, made with the help of the sophisticated time series econometric models, is one of the key elements of this volume. The analysis empirically tests the random walk hypothesis and focuses on issues like nonlinear dynamics, structural breaks and long memory. It uses new and disaggregated data on recent reforms and changes in the market microstructure. The data on various indices including sectoral indices help in measuring the relative efficiency of the market and understanding how liquidity and market capitalization affect the efficiency of the market.

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Chapter 1. Introduction

1.1Background

1.2 Theoretical Foundations

1.2.1 Forms of efficiency

1.3 Random Walk Model

1.4 Policy Reforms, Growth and Emergence of Stock Market in India

1.5 Issues and scope of the study

1.6 Nature and Sources of Data

2 Random Walk Characteristics of Stock Returns

2.1 Introduction

2.2 Review of Previous Work

2.3 Weak Form Efficiency: Empirical Tests

2.3.1 Parametric Tests

2.3.2 Nonparametric Tests

2.4 Discussion on Empirical Results

2.5 Concluding Remarks

References

3 Nonlinear Dependence in Stock Returns

3.1 Introduction

3.2 Methodology

3.3 Empirical Results

3.4 Concluding Remarks

References

4 Mean-reverting Tendency in Stock Returns

4.1 Introduction

4.2 Review of Previous Works

4.3 Data and Methodology

4.3.1 Zivot and Andrews (1992) Sequential Break Test

4.3.2 Lee-Strazicich (2003) LM Unit Root Multiple breaks Test

4.4 Empirical Findings

4.5 Conclusion

References

5 Long Memory in Stock Returns: Theory and Evidence

5.1 Introduction

5.2 Theory of Long Memory

5.2.1 Meaning and Definitions

5.2.2 ARFIMA Model

5.3 Review of Previous Work

5.4 Testing Methods

5.4.1 Geweke and Porter-Hudak Semi parametric (GPH) Test

5.4.2 Robinson´s Gaussian Semi parametric (RGSE) Test

5.4.3 Andrews and Guggenberger Bias Reduced (AGBR) Test

5.5 Empirical Evidence

5.5 Concluding Remarks

6 Long Memory in Stock Market Volatility

6.1 Introduction

6.2 Review of Previous Work

6.3 Data and Methodology

6.4 Empirical Results

6.5 Concluding Observations

References

Summary and Conclusion

Appendix

References

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Gourishankar S Hiremath is Assistant Professor of Economics & Finance at Indian Institute of Technology Kharagpur (India). He previously worked at Indian Institute of Technology Jodhpur, Gokhale Institute of Politics and Economics, Pune, and ICFAI Business School (IBS)-Hyderabad. He holds a PhD in Financial Economics from University of Hyderabad, India and his areas of specialisation include Financial Markets - Indian Capital Market, International Finance, Financial and Commodity Derivatives and Applied Time Series Econometrics. Dr. Hiremath has published several research papers in leading journals and in National and International conference proceedings. He has done research for National Bank for Agriculture and Rural Development (NABARD) and Climate Works Foundation, New Delhi. He is a member of Panel of Experts, Young Entrepreneurs Incentive Scheme of Rajasthan Financial Corporation sponsored by Council of State Industrial Development and Investment Corporations of India.

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