Random Walk Hypothesis in Emerging Stock Market: Evidence from Nairobi Securities Exchange

Abstract

Random walk theory explains the concept of efficient markets. The markets are described as efficient because they impound information whether private or public very quickly and reflect it in the prices of stocks traded. Investors therefore cannot outperform the markets based on the information gathered. Emerging stock markets have recorded mixed results with regard to their efficiency. Some scholars have argued that for these markets, efficiency is an evolving matter influenced by markets development. The study therefore examined whether the Nairobi Securities Exchange provides evidence of weak form efficiency for the period 2000-2009. This was done by conducting significance tests (at 0.05 level) for serial correlation and run tests to establish if security prices conform to random walk hypothesis. Results indicate that going by the evolving efficiency argument and contrary to prior period findings, the stock market price data pattern in this study yielded result that is consistent with the random walk hypothesis. Consequently, historical price information contained no useful information to use to beat the market in the period reviewed.

Keywords: Random Walk, Market efficiency, Nairobi Securities Exchange

JEL Classification: G32, G34