EMPIRICAL TEST FOR WEAK-FORM EFFICIENT MARKET HYPOTHESIS OF THE NIGERIAN STOCK EXCHANGE
ABSTRACT
This research empirically tested the
weak-form efficient market hypothesis of the Nigerian Stock Exchange
(NSE) by hypothesizing normality of the return distribution series,
random walk assumption and efficiency across time. Monthly all share
indices of the NSE were examined for normal distribution and random walk
from January 1993 to December 2007, as well as two sub-periods of
January 1993 to December 1999 and January 2000 to December 2007. Our
normality tests were made using skewness, kurtosis, Jarque-Bera and
studentized range tests; whereas weak-form efficiency was tested using
the nonparametric Runs test for both total and sub-sample periods. The
monthly return series, in aspect of skewness and kurtosis, were found
non-normal, which can be categorized as negative skewness for all
periods and playtykurtic distribution for total sample and sub sample2,
while sub-sample1 showed leptokurtic distribution. Same thing resulted
from J-B test and studentized range. As a result, null hypothesis of
normality in market returns was rejected and the alternative hypothesis
remained in effect. The results of the Runs test for the observed
returns show that the actual number of runs were fewer than the expected
number of runs for all periods examined, thus indicating evidence of
positive serial correlation in NSE monthly returns. The research further
provided evidence to show that improvements in market microstructure of
the NSE have positive effects on the weak-form efficiency of the NSE.
Overall results from the empirical tests suggest that the NSE is not
weak-form efficient. Relaxing institutional restrictions on trading
securities in the market and strengthening the regulatory capacities of
NSE and Nigerian Securities and Exchange Commission to enforce market
discipline were recommended.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Efficient Market Hypothesis (EMH) asserts
that in an efficient market, prices at all times fully reflect all
available information that is relevant to their valuation (Fama, 1970).
Thus, security prices at any point in time are unbiased reflection of
all available information on the security’s expected future cash flow
and the risk involved in owning such a security (Reilly and Brown,
2003:57). This implies that investors can expect to earn merely
risk-adjusted return from all investment as prices move instantaneously
and randomly to any new information (Kendal,
1953).
Market prices can at times deviate from
the securities’ true value; these deviations are completely random and
uncorrelated. Price changes are only expected to result from the arrival
of new information. Given that there is no reason to expect new
information to be non-random, period-to-period price changes are
expected to be random and independent. In other words, they must be
unforcastable if they fully incorporate the expectations and information
available to market participants (Lo, 1997: xii).
Efficiency is categorized into three
different levels according to the information item reflected in the
prices. The three levels of EMH are expressed as follows: weak-form,
semi–strong, and strong-form efficiency. The weak-form version of EMH
asserts that prices of financial assets already reflect all information
contained in the history of past prices, trading volume or short
interest. Semi-strong version postulates that stock prices already
reflect all the publicly available information regarding the prospects
of a firm. Lastly, the strong-form posits that the prices of financial
assets reflect, in addition to information on past prices and publicly
available information, information available only to company’s insiders
(Fama, 1970; 1991).
Early studies on testing weak-form
efficiency started on the developed markets, generally agree with that
stock markets are weak-form efficient based on low degree of serial
correlation and transaction costs (see for example, Kendal, 1953;
Cootner, 1962; Fama, 1965). All of these studies support the proposition
that price changes are random and past prices were not useful in
predicting future price changes particularly after transaction costs
were taken into consideration.
However, there are some studies, which
found the predictability of share price changes (anomalies) in developed
markets but did not reach a conclusion about profitable trading rules
(see, Fama and French, 1988; Lo and Mackinlay, 1988).
On the other hand, evidence of weak-form
efficiency on the emerging markets has been diverse. The first group
found weak-form efficiency in emerging markets (see, Olowe, 1999;
Dickinson and Muragu, 1994; Chan et al., 1992). The other group provide
evidence showing that emerging markets are not weakform efficient (see,
Appiah-Kusi and Menya, 2003; Cheung and Coutts, 2001; Claessens et al,
1995; poshakwale, 1996; Ntim et al, 2007)
The empirical literature on the weak-form
efficiency of the Nigerian Stock Exchange (NSE) has, however, been very
scanty despite the increase in size and public participation in the
market in recent times. The few exceptions to our knowledge include
Samuel and Yacout (1981), Ayadi (1984), Akpan (1995), Olowe (1999), and
Appiah–Kusi and Menya (2003). This dearth of research, providing
empirical evidence to support or dispute efficiency according to Simons
and Laryea (2004), may explain why many African countries have not
attracted much portfolio or equity investment as the Asian and Latin
American countries. This shortcoming has adversely affected the
country’s rapid economic transformations.
Hence, the need to provide further
evidence on the weak-form efficiency of NSE is of paramount interest to
investors (individual and institutional), regulators, academics, and the
economy in general.
1.2 STATEMENT OF THE PROBLEM
Nigeria seeks to become one of the twenty
largest economies in the world in the year 2020. The efficiency of
stock market in this regard cannot be overemphasized, for long-term fund
is a critical factor in the economic transformation process. More so,
stock markets afford investors the opportunity to diversify their
portfolios across a variety of assets. Given these importance of
efficient stock market, it is imperative to test the efficiency of the
Nigerian Stock Exchange
(NSE), since the extent to which the NSE
is efficient affects not only vision 2020 but all those who invest on
the bourse; be they individual or institutional investors.
Surprisingly, the NSE, which has been in
operation since 5th July 1961, has had a few prior empirical studies
analyzing it and their conclusion as to the predictability of future
stock returns based on the past returns and volume traded have been
diverse. For instance, Samuel and Yacout (1981) and Olowe (1999) found
evidence of weak-form efficiency, whereas Akpan (1995) and Appiah-Kusi
and Menya (2003) found the market weak-form inefficient. The dearth of
empirical literature is not healthy for the country’s aspiration to
become one of the twenty largest economies in the world since polices
that seek to attract foreign portfolio investment should be informed by
some empirical evidence on the stock market efficiency.
Furthermore, market microstructure
existing evidence suggests that improvement in trading system, market
capitalization, membership; value and volume traded lead to improvements
in liquidity and market efficiency (Amihud et al, 1997; & Suzuki
and Yasuda, 2006). The NSE has shown considerable improvements in
trading system. for instance, it established Central Securities Clearing
System (CSCS) in 1997 for clearing and settlement of securities
transactions, changed from call-over system to automated trading system
in 1998 (Bellow, 2002).
Membership of the exchange increased from
194 in 1981, 260 in 2000 to 310 by 2007. Market capitalization also
increased from N5 billion in 1981, N472.3 billion in 2000 to N7, 764
billion by April 2007 (www.databank.sec.gov.ng; NSE, 2005; Bellow,
2002). Accordingly, it can be conjectured that there should be
commensurate improvements in market efficiency of the NSE.
Testing the absolute efficiency of a
market does not seem to be the most informative method of gauging the
efficiency of a given market (Campbell, et al., 1997:24). Relative
efficiency – the efficiency of one market or one index, measured against
the other, appears to be a more useful concept than the view taken by
traditional literature. Even more useful will be the concept of
measuring a market’s efficiency across time to find if the level of
efficiency has changed.
This is in accord with Rahman and Hossain
(2006) conclusion that market efficiency changes over time and that
stock market is subject to be tested continuously. This study will,
therefore, examine the weak-form efficiency of the NSE both in absolute
and relative terms.
1.3 OBJECTIVES OF THE STUDY
The major objective of this study is to
examine whether the Nigerian Stock Exchange is Weak-form efficient. The
specific objectives are as follows:
- To determine whether the stock returns in the NSE Follow normal distribution.
- To examine whether the stock returns in the NSE follow a random walk over the time period of this study.
- To compare weak-form efficiency evidence across time for the NSE.
1.4 RESEARCH QUESTIONS
The answer to the following questions will guide us in collecting materials for this research:
- What is the distributional pattern of the NSE stock returns?
- Are the stock returns in the NSE random over the time period of this study?
- What is the nature of the NSE weak-form efficiency across time?
1.5 RESEARCH HYPOTHESES
As a follow up to the research questions and objectives of this study, the following hypotheses are tested:
Ho1 the stock returns in the NSE follow the normal distribution.
Ho2 the stock returns in NSE are random over the time period of this study.
Ho3 the NSE is weak-form efficient across time.
Though hypotheses of normality and
randomness are complementary, we use them simultaneously in order to
establish the robustness of the analysis.
1.6 SCOPE OF THE RESEARCH
This study will focus on empirical
investigation of the weak-form efficiency evidence on the NSE within the
framework of the efficient market hypothesis. It will cover period of
fifteen years – from January 1993 to December 2007.This period covers
the aspect dealing with our statistical analysis. It is also the period
in which security pricing is deregulated in the Nigeria capital market.
1.7 SIGNIFICANCE OF THE RESEARCH
This research empirically examines
weak-form efficiency evidence on the Nigerian Stock Exchange (NSE). It
will be of significance to investors, regulators and academics in the
following ways.
To the investors: This
study is timely especially now that share ownership is gaining
increasing popularity by the day in Nigeria. From its findings,
investors will formulate investment strategy for trading in the NSE. If,
for instance, evidence of weak-form efficiency does not hold for NSE,
Investors can earn abnormal profit by adopting active investment
strategy since future share returns can be forecasted from past returns,
otherwise passive investment strategy my be the best option (Bodie et
al., 1999;337).
To The Regulators: This
study will provide evidence that will assist Securities and Exchange
Commission (SEC) and NSE in formulating polices towards improved
performance, efficiency and development of the market.
To The Academics: This
study will contribute to knowledge and the extant literature to be
referred to by researchers. It will also throw more light on the
empirical evidence on weak-form efficiency of the NSE and extend the
existing evidence by using recently available data. In addition, it will
possibly spur other research work aimed either sustaining or debunking
its evidence.
1.8 Limitation of the Study
This research focuses on empirical
examination of the weak-form efficiency evidence on the NSE within the
framework of the efficient market hypothesis. As with other studies of
emerging stock markets, especially African stock markets, we have to
contend with data availability problems. Most of the available data are
on restricted basis as subscription to the relevant exchange is required
to access them. To represent the whole market, this study makes use of
monthly market indices rather than prices of individual securities. We
also use longer sample periods and therefore more data to combat thin
and infrequent trading, which are major sources of bias in such studies.
Aside data constraints, we also
experienced financial difficulties which restricted our subscription for
access to data. However, these limitations could not affect the outcome
of reliable evidence on weak-form efficiency of NSE based on current
data and sound econometric model and analytical tools.
1.9 DEFINITION OF TERMS
Active Investment Strategy: Active
investment strategy is an attempt to achieve portfolio returns more
than commensurate with risk either by forecasting broad market trends or
by identifying mispriced securities in the market (Bodie et al, 1999)
Anomalies: Anomalies are evidence that seem inconsistent with the efficient market hypothesis.
Automated Trading System (ATS): ATS is a method of trading on quoted securities using network of computers linked to each other (Bello, 2002).
Bull Market: A bull
market is a market that is on the rise. It is typified by a sustained
increase in market share prices. In such times, investors have faith
that the uptrend will continue in the long term.
Call–Over System: Call
over system of trading in securities is a system whereby stockbrokers
gather at the floor of the exchange at a particular time in the morning,
the listed securities are read out aloud while brokers indicate their
interest by shouting offer (for sale) or bid (to buy). The call–over
clerk confirms each deal (Bello, 2002).
Correction: A reverse
movement, usually negative, of at least 15% in a stock, bond, commodity
or index. Corrections are generally temporary price decline,
interrupting an uptrend in the market or asset.
Filter Rule: Filter rule or technique is a rule for buying or selling a stock depending on past movement of the stock.
Intrinsic Value:
Intrinsic value is the value derived by evaluating and analyzing
performance indicators of a share. It denotes the best valuation of a
share and that the expected return is commensurate with associated risk
of the share.
Market Microstructure: Market
microstructure is concerned with the functional set-up of a financial
market. It deals with trading on financial assets such as shares and
bonds. It deals, also, on the manner in which financial assets are
traded and how that process affect the prices of assets traded, volume
traded and the behaviour of traders. It is also concerned with the
efficiency and liquidity of the markets.
New information: New information is any news, good or bad, that is yet to be disseminated to the market participants.
Passive Investment Strategy:
Passive investment strategy is buying a well diversified portfolio to
represent a broad based market index without attempting to search out
mispriced securities (Bodie et al., 1999).
Random: Random here
means that period-to-period price changes should be statistically
independent and unforcastable. Price movements result from responses to
information and since new information arrives unpredictably, price
changes should be unpredictable.
Risk-adjusted returns: Risk-adjusted return is the profit from stock trading commensurate with the risk of the stock.
Serial Correlation: Serial correlation is the tendency for stock returns to be related to past returns.
Stock Market Bubble: Stock market bubble occurs when a wave of public enthusiasm, evolving into herd behaviour, causes an exaggerated bull market.
REQUEST FOR PROJECT MATERIAL
Good Day Sir/Ma,
WARNINGS!
PLEASE make
sure your project topic or related topic is found on this website and
that you have preview the abstract or chapter one before making payment.
Thanks for your interest in the research
topic. The complete research work will cost you N2000 and we will send
the material to you within 24hours after confirming your payment.
Make the payment of N2000 into any of the account
number below and we will send the complete material to you within
24hours after confirming your payment.
Account Name: Agada Leonard E
Account No: 2070537235
Bank: UBA
Or
Account Name: Agada Leonard E
Account No: 3049262877
Bank: First Bank
Or
Account Name: Agada Leonard
Account No: 0081241151
Bank: Diamond Bank
After payment, send the following information to us through this email
address: enemsly@gmail.com
Topic paid for:
Amount Paid:
Date of Payment:
Teller No or Transaction ID:
Name of Depositor:
Depositor Phone Number:
Email address:
NOTE: The material will be forwarded to the email address you provided
within 24hrs after confirmation of the payment.
Thanks.
Agada Leonard E.
For: Enems Project.
For more information visit our contact page @ CONTACT US
No comments:
Post a Comment