Challenging the Efficient Market Hypothesis: A Novel India VIX-RSI Composite and its Predictive Power in a Multivariate ARDL Framework

This study addresses a critical gap in modelling India’s equity market by challenging the weak-form Efficient Market Hypothesis (EMH) and moving beyond conventional linear framework. We pioneer a novel investor sentiment proxy, the India VIX-RSI composite, which synergistically captures market fear and momentum. Integrating this with valuation multiples (P/B and P/E ratios) and primary market resource mobilization -a previously neglected variable – we employ an Autoregressive Distributed Lag (ARDL) model on monthly data (2011-2025) to analyze short-run dynamics and long-run equilibria. The results provide compelling evidence against weak-form EMH. The India VIX-RSI composite demonstrates significant pre3dictive power, identifying high-risk “overbought and volatile” regimes as reliable contrarian indicators for short-term corrections. Valuation multiples act as potent contemporaneous mediators of returns. While global factors (MSCI World Index) anchor long-run cointegration, a significant error correction term confirms the market’s inherent efficiency in converging to fundamental values over time. We conclude that the Indian equity market exhibits a fundamental duality: it permits short-term exploitable inefficiencies driven by behavioral sentiment, yet maintains semi-strong form efficiency in the long-run. These findings offer profound implications, providing investors with a tactical tool for regime identification and furnishing policymakers with insights to enhance market stability and resilience.