Testing the random walk hypothesis: an empirical study of MASI and MADEX

Abstract

The random walk theory or random walk hypothesis is a mathematical model applied in the financial markets and is considered one of the most important models for evaluating the behavior of financial asset prices. It aims to represent the stock market variations, and it is based on the fact that the prices of financial securities are not predictable and that they evolve in a random way. This study aims to test the hypothesis of random walk in the Moroccan financial market over a period that varies between 02/01/2012 and 21/01/2021 or 2252 days, using different econometric tests, Augmented Dikky Fuller (ADF), Philips Perron (PP) and Runs Test. Testing this hypothesis implies testing the hypothesis of informational efficiency in the weak sense. Weak efficiency means that the information reflected in stock prices is information that can be derived from the history of those prices. It is useless to look at past variations to predict future variations. Therefore, technical analysis is useless.  The informational efficiency hypothesis was developed by Fama in 1965 and means that the market reflects all available information and that we cannot take advantage of historical data.  In fact, there are three forms of efficiency, weak, semi-strong and strong. Each form of efficiency has a level of age of the information that the prices reflect.  The results of these tests rejected the random walk hypothesis for the two stock market indices used (MASI and MADEX), and consequently the hypothesis of informational efficiency in the weak sense is also rejected.