Developing Country Studies www.iiste.org ISSN 2224-607X (Paper) ISSN 2225-0565 (Online) Vol.4, No.11, 2014 79 Testing the Weak Form Efficiency of Islamabad Stock Exchange (ISE) Syed Tauseef Raza Gilani ,Muhammad Nawaz ,Muhammad Irfan Shakoor and Muhammad Zulqarnain Asab MS Scholars, Department of Management Sciences, the Islamia University of Bahawalpur, Pakistan ABSTRACT: The characteristics of stock prices reflect the all available information in market. This study explored the weak form efficiency of Islamabad Stock Exchange (ISE). In this research paper, we have also revealed the behavior of stocks prices traded in Islamabad Stock Exchange, and how it behaves in different unusual events. Stock markets are the major contributor to economy. To test the weak form efficiency of Islamabad Stock exchange, we have tested Efficient Market Hypothesis. EMH is a method to measure the stock prices trends in the market. Efficient market hypothesis also helps for making the right investment decisions. From last two decades EMH has obtained much importance in the field of finance. So it has attracted many researchers to explore the anomalous behavior of efficient stock market. Efficient market hypothesis has three main categories: 1. Weak form 2. Semi-strong form 3. Strong form. We will focus only weak form of market efficiency in ISE. Focus of the study is to analyze the weak form of ISE-10 in the stock market. For this purpose we have used different statistical techniques for analyzing the data that is collected from the official website of ISE. Data will be in the form of weekly ISE-10 share index. Time period of data is From January, 2013 to December, 2013. To render this study to the conclusion, we have use the famous tests of statistics such as run test and ADF test to check the weak form of ISE. We have also focused on the random walk behavior of stock market of Islamabad. Because the price movement in random form, that investor could not predict the stock prices due to weak form. In weak form, no investor can get abnormal return in stock market. There is very large debate on stock activities that would be explode further. Key words: EMH, Islamabad Stock Exchange, Market efficiency, Test of weak form efficiency 1. INTRODUCTION Stocks markets play a very critical role in any country’s economy. So this research topic broadly analyzes the stock exchange behavior. This research area is very important in economics and finance. Basically markets are functioning with the help of investor’s behaviors and the activities performed by the markets. A philosophy of market proficiency has also been given by fama (1970). From the last three decades the researchers are working to find out, how an investor can earn abnormal return through using analytical techniques, because markets are performing according to market conditions so investors should have full knowledge about the market to earn excess returns. The Efficient market hypothesis (EMH) tells us the three basic forms of markets, which one is under study that is weak form efficient market. And the others two are semi-strong form, and strong-form of market efficiency. In the efficient market, prices reflect all available information, but how this information is reflected into the prices of securities and other stocks. So there are three types of efficient markets. 1.1 Weak-form efficient: In weak-form, no investor can trounce the market by using past price movement because in weak-form prices adjust according to the past information as he is reflected speedily in adjusting prices of stocks. These lines can be translated into simple words that past prices of stocks have no correlation with today’s stock price. Market called efficient in weak-form because it processes the information speedily, so prices cannot be predicted by the investors, so technical analysis for this phenomenon does not work for investors. 1.2 Semi-strong Efficient: In semi-strong efficient market, it refers that markets stock prices adjust as the public information reflect immediately, as the event occurs, prices get adjusted accordingly. So in this form, investor cannot predict the return by using publicly information. For this fundamental analysis fails to predict the market return because information is publicized. If market is semi-strong, it is also weak-form efficient market in which all public information used for predicting. 1.3 Strong-form efficient: In this type, market prices are adjusted according to publicly information as well as inside or private information. In this form of market efficiency, to get the abnormal profit you need to inform about the private information that prices are going up or down in a particular period of time for the concerned firm. So by using this information, an investor can get abnormal return. A strong form efficient market is also a weak-form and semi-strong form efficiency because public and past historical returns are used in this type of efficiency. For this reason, all the three types of EMH have been tested again over again to find out the efficiency level of a particular market. Higgs (2003) worked to find out the weak-form efficiency level in different European countries and four emerging markets. Various researches are available for developing countries and