“The stock marketsare a complex of institutions and mechanisms through which funds for purposeslonger than one year are pooled and made available to business, government, andindividuals and through which instruments already outstanding are transferred.The stock markets are well organised and are local, regional, national, andworld-wide in scope.
” (Johnson1983:32)The phenomenon of stock price movement has constantlybeen of great interest for many investigators, since it helps to inspect theefficiency of the stock market. The stock index actas a barometer of the value of a section of the stock market. Its price iscompounded from the prices of selected stocks, that is, a stock index isbasically a yardstick for the economy, or for some sectors of the economy. Theprice movements in the indices replicate the price movement in the companies inthe market. So, this means that the bigger the company, the more weight it hason the index and the more it will affect its price.
Prediction of stock market returns is a significantissue in finance, maybebecause of the fact that, if the direction of the market is effectivelypredicted the investors may be better guided. The success of investing andtrading in the stock market to a large extent depends on the predictability. Ifany system developed consistently predict the trends of the dynamic stockmarket, it would make the owner of the system wealthy. Furthermore, thepredicted trends of the market will help the regulators of the market in makingcorrective measures. One more motivation for research in thisfield is that it possesses many theoretical and experimental challenges. Themost important of these is the Efficient Market Hypothesis (EMH) (Fama, 1970).
Thehypothesis states that, in an efficient market, stock market prices fullyreflect available information about the market and its constituents and hence,any opportunity of earning excess profit ceases to exist. So, it is ascertainedthat no system is likely to outperform the market predictably and steadily.Hence, modelling any market under the assumption of EMH is only possible on thespeculative, stochastic component not on the fluctuations in value or otherfundamental factors (Pan Heping., 2004). Another related theory to EMH is the RandomWalk Theory, which states that all future prices do not follow any trend orpattern and are random departure from the previous prices.