Testing the Binomial Model in the Indian Stock Market

Mihir Dash ()

Journal of Applied Management and Investments, 2020, vol. 9, issue 1, 22-27

Abstract: This study examines a consequence of the Random Walk Hypothesis for stock prices. If stock price movements were random, it would imply that the number of forward movements of the stock price in the course of a week would follow a binomial distribution. This is the binomial model for stock price movements/returns. The study examines the binomial model for twenty major stocks from the Indian banking sector. The stock price data was collected from the National Stock Exchange (NSE). The study period selected was Apr. 1, 2009 to Mar. 31, 2019, a period of ten years. The results of the study do not support the RWH, as the Bin(n = 4, p = ½) distribution was rejected for a large proportion of sample stocks. However, the results may not be generalizable, as they are based on a small sample of stocks from the banking sector, for a period of only ten years, and perhaps they were affected by the ‘Modi Effects’ - both positive and negative. A more detailed study, with stocks from different industries, with a wider range of size/capitalisation, and for a longer study period, should be used to replicate/validate the results.

Keywords: Random Walk Hypothesis; binomial model; banking sector; National Stock Exchange (search for similar items in EconPapers)
JEL-codes: C58 G21 G24 (search for similar items in EconPapers)
Date: 2020
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