Testing Stochastic Trends in Shari'ah-compliant and Traditional Stocks of Pakistan Stock Exchange (PSX)

Abstract

The essential precondition of efficient markets is desired if funds need to be owed to the highest-valued projects. This is only conceivable Stock prices are well priced and replicate the ultimate value of future free cash flows. The current study is directed to examine Weak Form Efficiency (WFE) by using the indices of Karachi Meezan Index - KMI-30 and Karachi Stock Exchange KSE-30 as proxies on daily data set for the last ten years. The weak form efficient hypothesis was examined through the Random Walk Hypothesis (RWH) in the return series of closing. The statistical results were estimated with the Unit Root Tests namely Augmented Dickey Fuller Test and Philip Perron Test. The results exposed that the stocks of both the indices at levels is non-stationary and a trend is present in the movement and do not follow random walk thus the market is weak form inefficient. But at differenced level significantly rejected the null hypothesis and thus revealed the presence of randomness and market becomes weak form efficient. Furthermore, the estimated results demonstrate that Islamic stock index posted better results in terms of profits but is more volatile than their conventional counterpart. As regards to the informational efficiency, both the indices bear the same situation and are weak form inefficient thus the proper allocation of financial resources is not possible in PSX.