The main objective of this study is to address the question whether stock prices follow random walk all the time. Using the sample of three South Asian stock market indices, coupled with the powerful Hinich and Patterson (1995) windowed testing procedure, the results show that all the series under study move in a significantly non-random and dependent pattern for brief periods of time, while for the remaining majority of sub-periods the market moves along at a close approximation to a random walk. Hence, with the present findings, these three South Asian stock markets join the growing list of exchanges that at times move randomly and at other times may not. In addition to that, several important implications drawn from the findings are also provided in the paper.

The Efficient Market Hypothesis (EMH) introduced three decades ago was a major intellectual advance and reached its height of dominance in academic circles around the 1970s. Much research endeavor has been devoted over the years to empirically examine the efficiency of stock market price formation, both in developed and emerging stock markets. The phenomenal growth in this body of literature is partly due to the concern and interest of financial economists and investment communities on the predictability of stock prices in order to ‘beat the market’. Within this framework, the random walk theory of stock prices, which postulates that future price movements cannot be predicted from historical sequence of stock prices, has been widely employed to test the weak-form efficiency of stock market. As McInish and Puglisi (1982) pointed out, a sufficient condition for weak-form efficiency is that stock prices fluctuate randomly1. The justification is that in an efficient market, new information is deemed to come in a random fashion, thus changes in prices that occur as a consequence of that information will seem random. Hence, if stock prices are found to behave randomly, then this poses a major challenge to market analysts who employ time series modeling and technical analysts who believe that history tends to repeat itself, to the extent of implying that their work is of no real value to the stock market investors.