The Random Walk Theory And Stock Prices: Evidence From Johannesburg Stock Exchange

Abstract

In this paper, we test the Johannesburg Stock Exchange market for the existence of the random walk hypothesis using monthly time series of the All Share Index (ALSI) covering the period 2000 2011. Traditional methods, such as unit root tests and autocorrelation test, were employed first and they all confirmed that during the period under consideration, the JSE price index followed the random walk process. In addition, the ARIMA model was constructed and it was found that the ARIMA (1, 1, 1) was the model that most excellently fitted the data in question. Furthermore, residual tests were performed to determine whether the residuals of the estimated equation followed a random walk process in the series. The authors found that the ALSI resembles a series that follow random walk hypothesis with strong evidence of a wide variance between forecasted and actual values, indicating little or no forecasting strength in the series. To further validate the findings in this research, the variance ratio test was conducted under heteroscedasticity and resulted in non-rejection of the random walk hypothesis. It was concluded that since the returns follow the random walk hypothesis, it can be said that JSE, in terms of efficiency, is on the weak form level and therefore opportunities of making excess returns based on out-performing the market is ruled out and is merely a game of chance.

Is Greed Rewarded? Developing Heuristics for Greedy Investors Using Upper Partial Moments

“…This makes the investors unable to get the abnormal returns in the financial market. A number of studies have supported the random walk theory/hypothesis like (Chitenderu, Maredza, & Sibanda, 2014;Marulkar & Faniband, 2017).…”

Holistic Analysis of the Relationship Between Capital Structure and Stock Price of Consumer Staples

“…Therefore any attempt to forecast future stock prices will fail. Chitenderu et al (2014) are also of the view stock prices move in a random manner leading to the impossibility of forecasting stock prices in the market. Where there is an increase in stock price, an investor cannot foretell if there will be another increase as no correlation exists between past and future stock prices.…”

Modeling Long-Term Relationships in Philippine Stock Market (PSE) Indices: A Cointegration Analysis

“…This study revealed the fact that stock prices have a unit root that confirms the series is non-stationary and follows a random walk. In Africa, Chitenderu, Maredza, and Sibanda (2014) tested the existence of RWH in the All Shares index of the Johannesburg Stock Exchange. The period covered in the study was the year 2000 to 2011, and the outcome of the unit root test revealed that the data series was non-stationary and, therefore, followed a random walk.…”