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PRICING OF INFRASTRUCTURE EQUITIES: A TEST OF EFFICIENCY IN AN EMERGING MARKET

Sanjay Rajagopal

Western Carolina University, USA

 

ABSTRACT

The Indian economy has experienced rapid growth following a liberalization of economic and financial policies in the 1990s. Sustaining such growth requires significant investments in infrastructure, which renders the sector potentially attractive to market participants and brings into focus the question of capital market efficiency. The present study tests the stocks of infrastructure companies in this growing economy for weak form efficiency. Fractal analysis of the returns on 25 individual stocks comprising Indian infrastructure indices reveals the existence of significant long-range dependence within the majority of the series. Specifically, results are consistent with the notion that market participants overreact to new information, inducing volatility in excess of what might be expected for a random walk. Evidence of pricing inefficiencies would be of interest not only to technical traders seeking profit opportunities but also to policy makers concerned about attracting much needed capital into the infrastructure industry.

Key Words: Market efficiency, Fractal analysis, Rescaled Range Analysis, India, Infrastructure stocks.

JEL Codes: G10, G12, G14