A TEST FOR WEAK FORM EFFICIENT MARKET HYPOTHESIS: EVIDENCE FROM THE NAIROBI SECURITIES EXCHANGE

Abstract

An efficient stock market should allow security prices to reflect all available information such that stock prices adjust quickly and on average, without bias, to new information. It is expected that no one can detect mispriced securities to make abnormal gains over a period of time and in this way, the market will be deemed to be efficient. Empirical studies have shown mixed results in regards to the efficiency of emerging stock markets rendering the debate on random walk hypothesis to be inconclusive. It is based on this backdrop that this study tested the weak form of market efficiency in the Nairobi Securities Exchange (NSE).  It tested the null hypothesis that 42 selected stocks severally took a random walk over a 5 –year period. The selection of the stocks was based on continuous trading over the period of the study. The study used monthly average prices from January 2009 to December 2015 which were converted into natural log returns. Data analysis was carried out using serial correlation analysis and runs test analysis aided by Microsoft Excel and SPSS (version 20). The study plotted correlograms at 95% confidence intervals and further computed Ljung Box Q for 1 to 10 lags and Durbin Watson statistics for each selected stock. The study found inconsistency in the findings between runs test and serial correlation in that some of the companies that were found not to be efficient in one test were found to be efficient in another. However, it was generally found that at least 70% of the stocks were efficient in both tests which can be inferred to mean that NSE is largely efficient with some few outliers. This study recommended that a test of the weak form should be further conducted on the NSE utilizing the market indices (NSE 20 Share Index, All Share Index (NASI) and (NSE 25 Share Index) to confirm the above assertion that NSE is largely efficient.

Key Words: Efficient Market Hypothesis, Random Walk Model, Log Returns, Time Series, Technical and Fundamental Analysis

CITATION: Gichaiya, M. W., Mhuri, D. O., Muchina, S.,Munyua, C. M., Weru, V. W., Kamau, N. (2018). A test for weak form efficient market hypothesis: Evidence from the Nairobi Securities Exchange. The Strategic Journal of Business & Change Management, 5(4), 2087 - 2123.