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This study addresses the question of whether the adaptive market hypothesis provides a better description of the behaviour of emerging stock market like India. We employed linear and nonlinear methods to evaluate the hypothesis empirically. The linear tests show a cyclical pattern in linear dependence suggesting that the Indian stock market switched between periods of efficiency and inefficiency. In contrast, the results from nonlinear tests reveal a strong evidence of nonlinearity in returns throughout the sample period with a sign of tapering magnitude of nonlinear dependence in the recent period. The findings suggest that Indian stock market is moving towards efficiency. The results provide additional insights on association between financial crises, foreign portfolio investments and inefficiency.JEL codesG14; G12; C12

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In this article, the authors probe the role of irrational investor sentiment in the determination of Indian stock market volatility. The authors developed a new irrational aggregate sentiment index (IASI) to examine the issue. The conditional volatility is extracted from the nonlinear univariate models for the market indices and the IASI. The vector autoregression (VAR) is carried out to analyze the relationship between the volatility of irrational aggregate sentiment index and stock market volatility. The authors find a unidirectional causality from sentiment to stock market volatility, and their findings highlight the significance of sentiment in explaining the stock market volatility in India.

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