Stock market predictability: Non-synchronous trading or inefficient markets? Evidence from the national stock exchange of India

Abstract

Purpose

The main objective of this study is to obtain new empirical evidence on non-synchronous trading effects through modelling the predictability of market indices.

Design/methodology/approach

The authors test for lead-lag effects between the Indian Nifty and Nifty Junior indices using Pesaran–Timmermann tests and Granger-Causality. Then, a simple test on overnight returns is proposed to infer whether the observed predictability is mainly attributable to non-synchronous trading or some form of inefficiency.

Findings

The evidence suggests that non-synchronous trading is a better explanation for the observed predictability in the Indian Stock Market.

Research limitations/implications

The indication that non-synchronous trading effects become more pronounced in high-frequency data suggests that prior studies using daily data may underestimate the impacts of non-synchronicity.

Originality/value

The originality of the paper rests on various important contributions: overnight returns is looked at to infer whether predictability is more attributable to non-synchronous trading or to some form of inefficiency; the impacts of non-synchronicity are investigated in terms of lead-lag effects rather than serial correlation; and high-frequency data is used which gauges the impacts of non-synchronicity during less active parts of the trading day.

Citation

John Camilleri, S. and J. Green, C. (2014), "Stock market predictability: Non-synchronous trading or inefficient markets? Evidence from the national stock exchange of India", Studies in Economics and Finance, Vol. 31 No. 4, pp. 354-370. https://doi.org/10.1108/SEF-06-2012-0070