Effectiveness of Geometric Brownian Motion Method in Predicting Stock Prices: Evidence from India

Authors

  • Krishna Prasad Associate Professor
  • Bhuvana Prabhu
  • Lionel Pereira
  • Nandan Prabhu Associate Professor Manipal Institute of Management Manipal, Karnataka
  • Pavithra S.

Keywords:

Monte Carlo simulation, Efficient market hypothesis, Geometric Brownian Motion

Abstract

This research examines whether stock prices in the Indian stock markets follow a Geometric Brownian Motion (GBM). This study is keen on knowing if one can predict the simulated stock prices accurately against the actual stock prices. One-year, three-year, and five-year data of the historical stock prices of 50 stocks listed on the S&P BSE (Bombay Stock Exchange) Sensex 50 Index were employed as the base data to predict stock prices using the Monte Carlo simulation's GBM method. This study investigates whether there are statistically significant differences between the actual stock prices for three months and the simulated prices of the same period. This research has found that the GBM Monte Carlo simulation effectively predicts future stock prices for three months based on the historical data of stock prices of the past year. This study did not find significant differences between the actual and predicted stock prices when the simulation used the past one year's data. This research is original in the Indian context, as it situates the GBM method of Monte Carlo simulation in the premise of bounded rationality and efficient market hypothesis theories. There is thus the empirical evidence for bounded rationality and that the stock markets are not efficient.Keywords: Monte Carlo simulation; stock prediction tools; efficient market hypothesis; bounded rationality; geometric brownian motion

Author Biographies

Krishna Prasad, Associate Professor

Dr. Krishna Prasad, is an Associate Professor at Justice K S Hegde Institute of Management, Nitte, India. He holds PhD in finance from National Institute of Technology Karnataka, Surathkal and MBA specializing in Finance from Visvesvaraya Technological University, Belgaum, India. Currently he handles courses like Portfolio Management, Financial Reporting and Analysis and International Financial Management courses at the Institute. His area of research includes Corporate Finance, Corporate Governance and Reporting Practices.

Nandan Prabhu, Associate Professor Manipal Institute of Management Manipal, Karnataka

Dr. Nandan Prabhu is an Associate Professor at School of Management, Manipal Academy for Higher Education, Manipal, India. He holds PhD in management and has over 28 years of work experience in management education and taught more than 15 courses over a span of 27 years in the area of accounting, finance and organizational behaviour. He has published in reputed journals such as Industrial and Commercial Training, Indian Journal of Management and so on. His research interests are corporate finance, organisational behaviour and behavioural finance.

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Published

2022-11-30

Issue

Vol. 18 (2022): ASIAN JOURNAL OF ACCOUNTING AND GOVERNANCE

Section

Articles

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