Random walk in the Philippine stock market: Fact or fiction?: An observation of the behavior of the index and selected securities comprising the Philippine composite index from the period October 1994-October 1996

Date of Publication


Document Type

Bachelor's Thesis

Degree Name

Bachelor of Science in Management of Financial Institutions

Subject Categories

Finance and Financial Management


Ramon V. Del Rosario College of Business


Financial Management Department


Awarded as best thesis, [1997]

Thesis Adviser

Corazon Subido

Defense Panel Chair

Leila Y. Calderon

Defense Panel Member

Edwin Valleroso
Marvin Cruz


Being a part of the growing market, the proponents noticed the potential of the stock market that forced the researchers to work out the facts and fictions of the efficient market theory. This move later led the group into the boundaries of random walk theory.

According to an analyst of the Philippine Stock Exchange, when they do the analysis and forecasting values, 80% goes to the fundamentals while only 20% goes to charting. The reason for this is that the Philippines, as an emerging market, is a sentiment-driven market and highly sensitive on political issues. The same way that the fundamentalists believe that in emerging markets, economic risk is an extended version of political risk. In this case, analysts look more on the impact of news to the prices. With this in mind, the proponents decided to explore the information efficiency of the Philippine securities market by focusing on a study of the basic form of the Efficient Market Hypothesis, that is, the Weak form.

The Weak form of the efficient market hypothesis, otherwise called as Random Walk Theory, states that the information set that prices of securities in the market reflect, is composed of all data regarding the historical market prices and trading volume of securities. Hence, all information conveyed in past patterns of stock's price and volume of trading is currently impounded into the price of the stock. This means that no patterns allow investors to predict future stock prices behave randomly. In statistical terms, random behavior says that successive price changes are independent and identically distributed random variables. Thus, the null hypothesis to be tested is the independence of successive price changes.

The purpose of this paper will be to discuss first in detail the theory underlying the random walk model, and later test the model's empirical validity. In doing so, the researchers came up with an objective to test the price movements of selected securities. The technique used to achive this objective was the Auto Regressive Integrated Moving Average (ARIMA) modeling. This method was adopted by the researchers to examine the daily closing prices of the Phisix, as well as the securities representing the largest market capitalization per sector of the Composite index for a period of two (2) years. The researchers limited their study from October 1994-October 1996 because of two reasons: it was during this period when the Property sector, other than the Commercial-Industrial, Mining and Oil sectors, was included in the index and, the constituent stocks of the index during this period remained unchanged.

As mentioned, ARIMA model was used in the analysis of data. The preference of this technique as compared to other techniques used for time series analysis (for example, multiple regression) was mainly because ARIMA modeling provides a family of models, such that if a particular model is rejected, there are still other options (models) to choose from. Besides, it is a lot cheaper and easier to do because it only requires the variable in question. Other Advantages of the model were discussed in Chapter 4.

The result of the analysis presented that three (3) of the four chosen individual securities presented consistent and strong support for the model. This implies that for these companies, charting is of no real value to the stock market investor. This is an extreme statement and the chartist is certainly free to take exception. As for the Phisix and the chosen security under the oil sector, their results rejected the random walk theory. However, one economist, Mr. Cesar Rufino, explained an abrupt fluctuation of the index points for a span of 10 observations in our analysis as a contributing factor to the rejection of the theory. (refer to Chapter 7 - Discussion).

The main conclusion of this study is that the Phisix presented that random walk is simply a fiction. But if one would go into the analysis of individual securities, one would find out that certain securities consider the theory as fact.

The rationale of the Random Walk theory is that the most important advantage that one investor can have in the quest for market profits is the possession of information that no one else has about an investment. In short, he has to do everything he can to seek out clues to help him reach an estimate of the real value of the issue that the rest of the market do not recognize.

After analyzing this thesis, , the bottomline is that an investor has to pounce on news related to individual securities. Phisix should not be the sole basis for concluding the efficiency or inefficiency of information, and so with the market. This paper must be an eye-opener for the investors to look at individual securities because it may be the case, as what the thesis presented, that the results of the Phisix was not consistent with the results of the individual securities. This may hold true for other securities not included in the Composite index.

Abstract Format






Accession Number


Shelf Location

Archives, The Learning Commons, 12F Henry Sy Sr. Hall

Physical Description

103, [18] leaves : ill. ; 28 cm.


Investments--Philippines; Stocks--Philippines; Investment analysis; Random walks (Mathematics); Stock price indexes--Philippines

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