Validity of Random Walk Hypothesis and Technical Analysis: An Investigation of Pakistan Stock Market

Abstract

This study is conducted to check the random walk behavior and validity of technical analysis in Pakistan stock market. Random walk hypothesis is a popular theory which asserts that stock price follows random walk and due to this randomness prediction of stock prices is not possible. In this research three different forms of random walk are tested using different parametric and non-parametric statistical test. Data of daily historical stock index/price of KSE 100 index and selected sample of stocks for the sample period of Jan 2004 to Dec 2015 is used. Additionally, validity of popular technical indicators moving averages and MACD (Moving average convergence divergence) is tested using one sample t test and Welch t test for the same sample period. Results concludes that stock price follows nonrandom walk and technical analysis produces statistically significant positive return as compared to buy and hold strategy.