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

<ns3:p>Background The weak-form Efficient Market Hypothesis (EMH) is challenged in the complex market such as India where market structure and behavioral aspects could introduce inefficiencies. The existing models do not reflect the synergetic impact of investor sentiment, valuation measures, and primary market action. To address this gap, the study develops a new India VIX-RSI composite, and it examines the existence of predictable short-run patterns in conjunction with a stable long run equilibrium to give a subtle evaluation of market efficiency. Methods The paper will examine monthly data between January 2011 to May 2025. NIFTY 50 log returns is the dependent variable. The FPI/DII flows, P/B and P/E ratios, primary market mobilization, and global factors are the key independent variables (MSCI World Index, US Fed Rates, Crude Oil). The fundamental innovation is the India VIX-RSI composite which is a multiplicative index of the India VIX and NIFTY 50 RSI. The high-risk regimes are identified through which extreme fear and momentum are combined, and the reversals are predicted. Since the variables are mixed-order, a framework of Autoregressive Distributed Lag (ARDL) bounds testing is used to examine both short-run and equilibrium dynamics over the long-run, and with strong diagnostic tests. Results It has been found that there is a cointegrating long-run equilibrium between the NIFTY 50 returns, MSCI World Index and basic valuation (P/B ratio). Returns significantly depends on the new India VIX-RSI composite (β = −0.061, ρ &lt; 0.05), which is a contrarian indicator of overbought, volatile regimes in the short run. The fact that there is a large Error Correction Term (ECT = −0.107, ρ &lt; 0.01) is an indication that the adjustment process is strong and the short-term behavior inefficiencies are offset by long-run informational efficiency. Conclusion This research introduces a new tactical instrument the India VIX-RSI composite to select high risk reversal-prone market regimes, which offers empirical support to reject weak-form EMH. We find that the Indian market has a dual nature, the sentiment-driven nature is short-run, and the long-run market equilibrium is a global and fundamental market factor that provides insightful details to investors and policy-makers on market efficiency and stability.</ns3:p>