The Role of Return Intervals in Determining Market Efficiency: Evidence from the Pakistan Stock Market

Abstract

This study examines the role of return intervals—daily, weekly, and monthly—in determining market efficiency in the Pakistan Stock Market (PSX). Consequently, by applying the Augmented Dickey-Fuller hypothesis test of Random walk and Variance Ratio test, the study explores and examines whether the stock prices took the truly random walk prevalent in the Efficient Market Hypothesis (EMH). From the test findings, it can be concluded that both daily and weekly rates are in weak-form efficient markets – non-stationary and random-walk. Nonetheless, monthly returns exhibit inefficiencies as it has already been affirmed by the stationarity of the data besides bouncing back with a very strong rejection of the random walk hypothesis. These inefficiencies could be due to such factors as macroeconomic shocks, market cracks, and hysteria that are characteristic of most emerging markets. The results imply that short-term traders cannot obtain reliable predictors for returns but long-term holders could potentially ascertain exploitable regularities in monthly returns. This research also emphasizes the need to increase the transparency of the market and the effectiveness of the regulation to increase the efficiency of the Pakistan Stock Market. New studies should also utilise larger return intervals including quarterly, and annual intervals, as well as adding external macroeconomic variables to get an improved understanding of the efficiency of the market.