AN INVESTIGATION ON WHETHER OR NOT THE NIGERIAN CAPITAL

MARKET IS WEAK FORM EFFICIENT.

BY ADEKOYA ADENIYI ADEBOWALE
AUGUST, 2013
INTRODUCTION
The capital market has been identified as an institution that contributes to the socioeconomic growth and development of emerging and developed countries (economies).
This is made possible through its vital role in intermediation process in those
economies. Osaze (2000) sees the capital market as the driver of any economy to
growth and development because it is essential for the long term growth capital
formation.
The Nigerian capital market provides the necessary lubricant that keeps turning the
wheel of the economy. It is not only providing the funds to projects of best returns to
fund owners but also ensuring funds are channelled to the appropriate areas. This
allocation function is critical in determining the overall growth of the economy. The
functioning of the capital market affects liquidity, acquisition of information about
firms, risk diversification, savings mobilization and corporate control (Anyanwu,
1998).
Over the years, conventional economists (classical and neoclassical), have
consistently maintained that, an unregulated market price is the best yardstick
reflecting true scarcity or worth of a commodity.
In the same regard, the efficient market hypothesis is based on the notion that stock
prices is informational efficientreflecting all available information about the value of
an asset in the financial market at every moment. This therefore implies that in an
efficient market, stock prices are equal to the true worth of the stock, defined as
discounted future cash flows.
According to efficient market hypothesis, changes in stock prices are impossible to
predict from available public information and the only thing that can move stock price
is news that changes the markets perception of a firms asset value. Thus when good
news about a firms prospect becomes public, the value and stock price of the firm
both appreciate and when the companys prospect deteriorates both the value and
stock price of the firm depreciates.
Proponents of the efficient market hypothesis, argued that the efficient market
hypothesis does much better as a description of the world than might be thought about
(Markiw, 2009).
Statement of Problem
In line with the conflicting opinions discussed above, empirical studies on the
informational efficiency of major stock markets have been extensively examined
while interesting research on stock market development in developing countries has
been on the increase. This present study is an endeavour in this direction, by analyzing
the extent to which the Nigerian stock market has been informational efficient. This
study seeks to test for the weak form of EMH in emerging stock markets with
emphasis on the Nigerian stock market.
1

More so taking cognisance of the Nigerian Stock Exchange as one of the renowned
stock market in Africa, minimal research has been carried out on efficient market
hypothesis for the Nigerian stock market. This study thus, seeks to establish empirical
evidence of the weak form market efficiency in the Nigerian stock market.
Objective of the Study
The purpose of the study is to investigate whether or not the Nigerian capital market is
weak form efficient.
Research Questions
This research will be guided by the following research question:
Is the Nigerian capital market weak form efficient?
Significance of the Study
The testing of the efficient market hypothesis is of particular interest in Nigeria
because of its implication for both foreign and local investors who make their decision
based on current market values and the expected risk-return trade-off that are
associated with such investments.
Also, an informationally efficient stock market is essential for the positive relationship
between developed stock markets activities and economic growth to occur (LagoardeSegot and Lucey, 2008), especially in the wake of the various financial reforms
implemented by the Central Bank of Nigeria to restore market stock from its decline
state following the global financial crisis in 2008.
Scope of the study
The study is limited to data collected on daily share prices on the Nigerian capital
market and spans for a period 2008 to 2012.

LITERATURE REVIEW
Forms of Market Efficiency
Fama (1970) classified the information set into three subsets and suggested three
forms (levels) of EMH, depending on the definition of the relevant information
subsets, namely the weak, semi-strong, and strong form. However, studies over the
years have showed that concept of Efficient Market Hypothesis may almost certainly
be false due to various abnormalities and anomalies (Malkiel 2003, Schwer 2003 and
Shiller 2003), such anomalies include the evidence of volatility of returns on
investments (Lo and MacKinlay 1990), size effect (Banz 1981 and Reinganum 1981),
the weekend effect (French 1980), the value effect (Basu 1977) and the momentum
effect (Fama and French 1996) among others.
The Strong-form market efficiency
In its strongest form, the EMH says a market is efficient if all information relevant to
the value of share, whether or not generally available to existing or potential investors,
is quickly and accurately reflected in the markets price. It is the most satisfying and
compelling form of EMH in a theoretical sense, but it suffers from one big drawback
2

in practice. It is difficult to confirm empirically as the necessary research would be

unlikely to win cooperation of the relevant section of the financial community insider
declares.
The financial points hold in the strong-form EMH:
I. Share prices reflect all information and no one can earn excess returns.
II. To test for the strong form efficiency, a market needs to exist where investors
cannot consistently earn excess returns over a long period of time. When the topic of
inside trading is introduced where an investor trades on information not yet publicly
available, the idea of a strong-form market seems impossible.
III. If there are fund managers who have consistently beaten the market, then it cannot
be described as being strong-form efficient. Common sense and empirical evidence
suggest that stock markets are unlikely to be strong form efficient.
The Semi-strong form market efficiency
In a slightly less rigorous form, the EMH says a market is efficient if all relevant
publicly available information is quickly reflected in the market price. If the strong
form is theoretically the most compelling, then the semi-strong form perhaps appeals
most to our common sense. It states that no investor can earn excess returns from
trading rules based on publicly available information .If the market is semi-strong
form efficient, then stock price reacts so fast to all public information that no investor
can earn an above normal return (higher than the market or return on the S&P 500
index) by acting on this type of information. Tests of semi-strong form efficiency have
shown that no investor can earn an above normal return on publicly available
information such as annual accounting reports block trades (Fama, Fisher, Jensen, and
Roll,1969), earning announcements, stock split announcements, dividend
announcements, and repurchase of stock announcement .Example of public
information include stock splits, dividend increases, and repurchases .For example, if
an individual buys the stock on the announcement date and still does not make an
above normal return, the market is semi-strong form efficient.
Under the semi-strong form EMH; the following are assumed:
I. Share prices adjust instantaneously and in an unbiased manner to publicly available
new information so that no excess returns can be earned by trading on that
information.
II. Semi-strong form efficiency implies that fundamental analysis will not be able to
produce excess return.
III. To test for it, the adjustments to previously known news must be of a reasonable
size and must be instantaneous. If there are consistent upward or downward
adjustments, it would suggest that investors had interpreted the information in a biased
manner and hence in an inefficient way.
Weak-form market efficiency
In the least rigorous form, the EMH confines itself to adjust one subset of public
information, namely historical information about the share price itself. New
information must by definition be unrelated to previous information; otherwise it
would not be new. It follows from this that every movement in the share price in
response to new information cannot be predicted from last movement or price. The
3

future price cannot be predicted from the last movement or price. The future price
cannot be predicted from a study of historic prices.
As for the weak form EMH, it states that:
I. No excess returns can be earned by using investment strategies based on historical
share prices or other financial data.
II. Weak form efficiency implies that technical analysis will not be able to produce
excess returns.
III. To test the weak form efficiency, it is sufficient to use statistical investigations in
time series data of prices. In a weak form efficient market, current share prices are the
best, unbiased, estimate of the value of the security. News is generally assumed to
occur randomly, so share price changes must also therefore be random.
Empirical Literature on the Weak Form Efficiency
Dickinson and Muragu (1994), Olowe (1999) and Mikailu & Sanda (2007) find that
the Nairobi and Nigerian stock exchanges respectively are efficient in the weak form.
Turning to stock markets in the Latin American region,
Grieb and Reyes (1999) show empirical findings, which are obtained from the
variance ratio tests, to reject the hypothesis of random walk for all stock market
indexes and most individuals stock in Brazil and Mexico.
Karemera et al. (1999) find that stock return series in Brazil, Chile, and Mexico do not
follow the random walk, based on the results of single variance ratio tests, but
Argentina does. However, when the multiple variance ratio test is applied, the market
index returns in Brazil is observed to follow the random walk process.
Sharma and Kennedy (1977) report that the random walk hypothesis cannot be
rejected for stock price changes on the Bombay (India) and Dhaka Stock Exchange
(Bangladesh) respectively.
Bashir (2009) using weekly returns for the 69 most actively traded shares over the
period 1995-2005. In his study to tests the weak-form of the EMH using a battery of
tests including tests of autocorrelations and technical trading strategies. Findings in
the analysis indicate that the Nigerian market may be weak-form efficient for ordinary
investors who operate in a costly trading.
Godwin (2010), attest that the weak form hypothesis has been pointed out as dealing
with whether or not security prices fully reflect historical price or return information.
To carry out this investigation with the Nigerian stock market data, he employed the
run test and the partial autocorrelation function as alternate forms of the research
instrument. His results of the three alternate tests revealed that the Nigerian stock
market is efficient in the weak form and therefore follows a random walk process. He
concluded that the opportunity of making excess returns in the market is ruled out.
However, there are many conflicting studies on the issue of EMH on the Nigerian
Stock Market. This study shall take a position whether or not to reject EMH or not to
reject, based on the data and the period of study.
RESEARCH METHODOLOGY
For the purpose of this research, the correlational or Prospective Research Design will
be applied. It attempts to explore relationships to make predictions. It uses one set of
subjects with two or more variables for each.
4

Population of study
The population of study entails all listed daily shares prices on the Nigerian Stock
Exchange. Taking cognizance of the volume of data involved, the research will be
restricted to listed shares prices of companies on the Nigerian Stock Exchange from
(2008-2012).
Sample & Data Set
The sample data involves daily shares prices of six (6) companies on the Nigerian
Stock Exchange from 2008 -2012. Data was collected from the internet, NSE data
base, companys annual reports and companys websites.
Data Collection Instrument
For the purpose of this study data will be collected using secondary source of data.
This will involve collection of data from administrative records of Nigerian Stock
Exchange, publication from organizations, internet.
Methods of Analyses
As discussed in chapter two of this study, one way to test the weak-form version of the
efficient market hypothesis is to find out whether the historical sequence of stock
prices of a given stock are independent of one another or whether they are related to
one another. Thus, in this study we text the weak-form of the efficient market
hypothesis using the serial correlation analysis and the regression analysis.
The Serial Correlation Analysis
The first statistical technique adopted in this study to examine the weak-form
hypothesis is the random walk model. Formally, the random walk model can be
written as:
Pt =P t1 + t (1)
Where
Pt is the price at time t,
Pt1
t

is the price in the immediate preceding period and

is the random error term.

The price change,

P t P tPt 1

is simply

which is the noise or random

variable, is assumed to be unpredictable from previous price changes. Thus, the serial
correlation coefficient which measures the degree of dependence between itself (
and its value of nth period earlier (
r n=

tn

), is defined as:

covariance (t , tn )
varaiance ( t )

If the calculated serial correlation coefficient is not statistically different from zero in
a statistical sense, we can conclude that the random walk model is valid, that is,
previous stock price movement cannot be used to predict future behaviour of stock
price movement.
5

THE RUNS TEST

The second statistical technique adopted to detect for the weak form efficiency of the
Nigerian stock market is a nonparametric test called runs test. The runs test is
considered more appropriate than the parametric autocorrelation test since all
observed series do not follow the normal distribution.
The test is based on the premise that if a series of data is random, the observed number
of runs in the series should be close to the expected number of the runs. A run can be
defined as a sequence of consecutive price changes with the same sign. Therefore,
price changes of stocks can be categorized into three kinds of run: upward run (prices
go up), downward run (prices go down) and flat run (prices do not change). Under the
null hypothesis of independence in share price changes, the total expected number of
runs (G) can be estimated using the procedure below:
Assumptions for applying runs test
1. The sample data are arranged according to some scheme (such as time series)
2. The data falls into two separate categories (such as above and below a specific
value).
3. The runs test is based on the order in which the data occur; not on the frequency of
the data.
Notation:
n1 = number of elements in the sequence with characteristic 1
n2

= number of elements in the sequence with characteristic 2

G = number of runs.
Where, the test statistic is given as;
Z=

G G
G

G=

2 n1 n2
+1
n 1+ n2

G=

( 2 n1 n2 ) ( 2 n1 n2n1n2 )
+1
2
( n 1+n 2 ) ( n1+ n21 )

The Critical value checked from the standard normal probabilities table (Z table)
significance level of 5%.
Decision rule
All tests in this study were carried out using 1%level of significance. The decision rule
for the acceptance or rejection of the null hypothesis is thus, based on the comparison
6

of the probability value obtained from the result using the software and the level of
significance proposed for the study.
The decision rule for rejection or acceptance of the null hypothesis is thus stated as
follows;
When the stated probability value from the result of analysis is lesser than 1%, the null
hypothesis will be rejected, otherwise,
When the stated probability value from the result of analysis is greater than 1%, the
null hypothesis will be accepted.
DATA ANALYSIS AND INTERPRETATION
AUTOCORRELATION TESTS

To test the weak form of EMH for the Nigerian stock market, first the autocorrelation
tests with 16 lags are performed for daily share price of five individual stocks. The
results of these tests are as summarized below.
SUMMARY OF RESULTS FOR AUTOCORRELATION ANALYSIS FOR
DAILY SHARE PRICES OF THE SIX COMPANIES
LAG

FIDSON
HEALTH
PLC

DARR
COMMUNI
CATION

BECO
PETROLEU
M

BIG
TREAT

CHAMS

Autocorrela
tion
.989

ASO
SAVINGS
AND
LOANS
Autocorrel
ation
.993

1.

Autocorr
elation
.982

Autocorrela
tion
.994

Autocorr
elation
.997

Autocorr
elation
.987

2.

.962

.976

.983

.987

.992

.971

3.

.942

.961

.972

.978

.985

.953

4.

.921

.945

.960

.969

.978

.934

5.

.902

.929

.947

.959

.970

.915

6.

.885

.912

.932

.947

.961

.897

7.

.870

.896

.916

.936

.952

.878

8.

.857

.880

.900

.923

.942

.860

9.

.847

.864

.884

.911

.931

.843

10.

.837

.848

.867

.899

.920

.827

11.

.830

.833

.850

.888

.908

.812

12.

.824

.818

.832

.878

.896

.797

13.

.820

.804

.814

.870

.884

.783

14.

.814

.789

.795

.862

.872

.769

15.

.807

.774

.778

.854

.860

.755

16.

.797

.759

.761

.847

.848

.742

The result shows the autocorrelation tests for daily share prices for trading of FIDSON
HEALTH PLC, DARR COMMUNICZTION, ASO SAVINGS AND LOANS, BECO
PETROLEUM, BIG TREAT and CHAMS respectively. When the observed returns
are used, it is found that the null hypothesis of random walk is rejected for FIDSON
HEALTH PLC, DARR COMMUNICZTION, ASO SAVINGS AND LOANS, BECO
PETROLEUM, BIG TREAT and CHAMS series. Specifically, it is evident that
autocorrelation coefficients are significantly different from zero with a positive sign
from 1st, to the 16th lag. It is worth to note here that the positive sign of the
autocorrelation coefficients indicates that consecutive daily returns tend to have the
same sign, so that a positive (negative) return in the current day tends to be followed
by an increase (decrease) of return in the next several days.
RUN TESTS

To detect for the weak form efficiency of the Nigerian stock market, the
nonparametric runs test is also used in this study. The runs test is considered more
appropriate than the parametric autocorrelation test since all observed series do not
follow the normal distribution
RUNS TEST FOR THE SIX COMPANIES

Test
Value(Median)
Cases < Test
Value
Cases >= Test
Value
Total Cases
Number of
Runs
Z
Asymp. Sig. (2tailed)

FIDSO
N
HEALT
H PLC
2.80

DAAR
COMMI
UNICA
TION
.81

Runs Test
ASO
SAVING
S AND
LOANS
.93

301

306

319

.73

2.59

CHARM
S
NIGERIA
PLC
.70

310

254

310

305

314

310

257

310

315

620
33

620
6

620
10

511
6

620
10

620
24

-22.345
.000

-24.518
.000

-24.196
.000

-22.185
.000

-24.196
.000

-23.071
.000

BECO
PETROL
EUM

BIG
TREAT
PLC

a. Median

As observed from the table above, the results of the runs test for daily share prices for
the six firm considered for this study indicate that the actual runs of all series are
significantly smaller than their corresponding expected runs at 1% level, so that the
null hypothesis of independence among stock returns is rejected for these series.
DISCUSSION OF FINDINGS
The respective analysis carried out in this chapter revealed that, the results of the
autocorrelation tests for the share prices of six selected firms listed on the Nigerian
Stock Exchange indicate that the random walk hypothesis is rejected for the share
prices of all selected individual stocks. On the basis of the empirical results obtained
from autocorrelation tests for the observed returns, it can be concluded that the null
hypothesis of random walk is rejected for the all selected individual stocks.
Furthermore, the runs test provides evidence to reject the null hypothesis of random
walk for the daily observed share prices of all selected individual stocks.
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1

SUMMARY OF THE STUDY

This study provided an overview of the theoretical literature on the EMH. Specifically,
three theoretical models suggested by Fama (1970), namely the Fair Game model, the
Sub-martingale model, and the Random Walk model, were briefly examined. The
theoretical models of efficient market consistently imply that the future price of stock
is unpredictable with respect to the current information, so market participants cannot
earn abnormal profits. Additionally, the study also examined the three different levels
of EMH, weak form, semi-strong form, and the strong form. Following the theoretical
literature, empirical studies on the weak form of EMH in emerging stock markets have
been extensively conducted, especially in recent years. The empirical evidence
obtained from these studies is mixed. Indeed, while some studies show empirical
results that reject the null hypothesis of weak form market efficiency, the others report
evidence to support the weak form of EMH. In general, emerging stock markets are
unlikely to be efficient in weak form possibly due to their inherent characteristics,
such as low liquidity, thin and infrequent trading, and lack of experienced market
participants.
On the basis of the theoretical and empirical literature that was reviewed in this study,
the weak form of market efficiency for the six selected individual stocks is tested by
using daily return data for the period from 2008-2012.
Moreover, in order to test the weak form of EMH for the Nigerian stock market, two
different techniques are employed, namely autocorrelation and runs tests. The results
obtained from the autocorrelation indicate that the null hypothesis of random walk is
conclusively rejected for the six selected individual stocks.
9

In addition, the runs test shows evidence to reject the null hypothesis of a random
walk for daily observed returns of all selected individual stocks.
CONCLUSION
In general, it can be concluded that the Nigerian stock market is inefficient in the
weak form. The inefficiency can be traced to: The low level of transparency of
operations of the stock market. There are instances of insider trading, deception,
complacency by NSE officials in enforcing rules, delay in issuance of certificates and
in dividend declaration, exploitative fees by brokers, and other market makers
(Anonymous, 2008). Another prominent factor the can be responsible for the weak
form efficiency are instances of stock overvaluation and cooked accounting books as
in the case of Cadbury Nigeria Plc (Oluba, 2008; Ryan, 2006). Information has a
positive effect on the efficiency of the Nigerian capital market. A market is said to be
efficient when security prices fully reflect all available information. This means that
the price of stocks moves with the influx of information. It is thus pertinent to
conclude that an efficient market holds intense implications for investors, companies
and regulators; as such effort must be geared to strengthening activities/operations in
the Nigerian capital market.
RECOMMENDATIONS
The following recommendations are capable of enhancing the efficiency of the
Nigerian capital market:
(i) The Nigerian stock exchange and Securities and Exchange Commission should be
more purposeful and aggressive in educating and enlightening the investing public on
the workings and technicalities of the market.
(ii) Institutional investors and stock broking firms should be more committed to
continuous training and re-training of their staff.
(iii) SEC should ensure that its rules are adequate, relevant and up-to-date.
(iv) Institutional investors and stock broking firms should invest more in information
technology apparatus.

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