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Testing the Binomial Model in the Indian Stock Market

Author

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  • Mihir Dash

    (Alliance University, India)

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.

Suggested Citation

  • Mihir Dash, 2020. "Testing the Binomial Model in the Indian Stock Market," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 9(1), pages 22-27, March.
    • Handle: RePEc:ods:journl:v:9:y:2020:i:1:p:22-27
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    References listed on IDEAS

    as
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    4. Dash, M., 2019. "Testing the Random Walk Hypothesis in the Indian Stock Market Using ARIMA Modelling," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 8(2), pages 71-77, May.
    5. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Random Walk Hypothesis; binomial model; banking sector; National Stock Exchange;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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