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

Background The validity of the weak-form Efficient Market Hypothesis (EMH) remains uncertain in emerging markets such as India, where investor sentiment, valuation dynamics, and market structure jointly influence price formation. Existing models do not adequately capture the interaction between volatility and momentum, which may generate short-run inefficiencies. This study examines whether short-run predictability coexists with long-run equilibrium by introducing a composite indicator that reflects both market fear and trend persistence. Methods The study used monthly data from January 2011 to May 2025, with NIFTY-50 as the dependent variable. Key explanatory variables included global factors (MSCI World Index, Crude Oil Prices, US Fed Rates), Valuation indicators (P/E and P/B Ratios), and market activity measures. A novel India VIX-RSI composite was constructed as a multiplicative index to capture the joint effect of volatility and momentum. The Autoregressive Distributed Lag (ARDL) model was applied to estimate short-run and long-run relationships. Robustness was examined using Johansen cointegration, VECM, DOLS, FMOLS, NARDL, and EGARCH models, along with stability and structural break tests. Results The findings indicate the presence of a stable long-run relationship between NIFTY, global variables, and valuation indicators. The error correction term is negative and significant (ARDL ECT≈-0.107, p<0.01), indicating convergence towards equilibrium. In the short-run, the India VIX-RSI variable shows a negative and significant effect (β=-0.061, p<0.05), suggesting that high volatility combined with strong momentum leads to temporary mispricing and subsequent correction. The EGARCH results show significant asymmetric volatility (γ≈-0.41, p<0.01), while the NARDL results indicate limited asymmetry in mean returns. Out-of-sample forecasting results show higher prediction error when the composite variable is included, indicating that it improves explanation rather than prediction. Conclusion The study shows that the Indian stock market exhibits time varying efficiency. Short-run movements are influenced by sentiment-driven deviations, while long-run dynamics reflect adjustment towards fundamentals. The India VIX-RSI composite serves as an effective indicator of short-run inefficiency and regime-specific behavior. The results indicate that weak-form efficiency does not hold in the short-run, while long-run adjustment is consistent with semi-strong efficiency.