Predictability of Returns: A Case Study of Karachi Stock Exchange, Pakistan

Abstract

The study has been designed to investigate the information efficiency in the Karachi stock market. This is examined using stock market indices from July 1997 – July 2007. Weekly stock indices are used for evaluation of KSE. The daily stock indices are not used because of several biases such as bid ask spread, non-trading etc. The Efficient Market Hypothesis (EMH) was tested using a GARCH model. It is concluded that Karachi Stock Exchange is information inefficient and the predictability of returns and risk is possible. These tests indicate non-randomness in the behavior of Karachi Stock Exchange indices and hence cast a shadow on the efficiency at the KSE. These are the powerful test and hence their results can be relied upon. The study recommends that SECP step up its regularity measures in the general interest of the public.