Empirical Test for Weak Form Efficient Market Hypothesis of the Nigerian Stock Exchange

Abstract

In recent years, the Nigerian Stock Exchange (NSE) has witnessed an unprecedented growth in market capitalization, membership, value and volume traded. By December 2007, the All Share Index has grown massively to 57,990.2 from 1113.4 in January 1993. This rising interest in investment opportunities in the NSE raises questions about its efficiency. This paper, therefore, tests the Weak-form Efficient Market Hypothesis of the NSE by hypothesizing Normal distribution and Random walk of the return series. Monthly All Share Index of the NSE is examined from January 1993 to December 2007. Our Normality tests include Skewness, kurtosis, Jarque-Bera and Studentized Range tests; whereas Random walk is tested using the non-parametric Runs test. Results of the Normality tests show that returns from NSE do not follow normal distribution. Runs test results reject the randomness of the return series of the NSE. Overall results from the tests suggest that the NSE is not weak form efficient. Reduction of transaction cost so as to improve market activities and Minimizing institutional restrictions on trading of securities in the bourse were therefore recommended.

Keywords: Weak-form Efficiency, Random-walk, Normal Distribution, Nigerian Stock Exchange

JEL Classification: G14