CBN Journal of Applied Statistics (JAS)

Volume 3 Number 1 Article 6

Summer 7-1-2012

Testing the Weak-form Efficiency Market Hypothesis: Evidence

from Nigerian Stock Market
Gimba K. Victor
Central Bank of Nigeria

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 CBN Journal of Applied Statistics Vol. 3 No.1 117

Testing the Weak-form Efficiency Market Hypothesis:

Evidence from Nigerian Stock Market
Victor K. Gimba1

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 over 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 tests the Weak-form Efficient Market Hypothesis of the NSE by
hypothesizing Normal distribution and Random walk of the return series. Daily and
weekly All Share Index and five most traded and oldest bank stocks of the NSE are
examined from January 2007 to December 2009 for the daily data and from June 2005 to
December, 2009 for the weekly data. The empirical findings derived from the
autocorrelation tests for the observed returns conclusively reject the null hypothesis of
the existence of a random walk for the market index and four out of the five selected
individual stocks. In general, it can be concluded that the NSE stock market is inefficient
in the weak form. Given the empirical evidence that the stock market is weak-form
inefficient, it is believed that anomalies in stock returns could be existent in the market
and reduction of transaction cost so as to improve market activities and minimizing
institutional restrictions on trading of securities in the bourse were therefore
recommended.

JEL Classification: G1, C1.

Keywords: Weak-form Efficiency; Random-walk; Autoregression; Nigerian

Stock Exchange; Runs and Variance Ratio tests

1.0 Introduction

During the past decades, the efficient market hypothesis (EMH) has been at the
heart of the debate in the financial literature because of its important implications.
Fama (1970) defined a market as being efficient if prices fully reflect all available
information, and suggested three models for testing market efficiency: the Fair
Game model, the Submartingale model, and the Random Walk model. Also,
according to Fama (1970), EMH can be categorised into three levels based on the
definition of the available information set, namely weak form, semi-strong form,
and the strong form. Following the work of Fama, the EMH has been widely
investigated in both developed and emerging markets. Especially, in emerging

1
Department of Economics, Faculty of Social and Management Sciences, Kaduna State
University (vgimbakyari@[Link], +234(0)8036839965).
118 Testing the weak-form efficiency market hypothesis:
Evidence from Nigerian Stock Market Gimba

stock markets, most empirical studies have focused on the weak form, the lowest
level of EMH because if the evidence fails to support the weak-form of market
efficiency, it is not necessary to examine the EMH at the stricter levels of semi-
strong and strong form (Wong and Kwong, 1984). Although many empirical
studies have been devoted to testing for the weak form of EMH in emerging stock
markets such as the Nigerian stock market (Mikailu and Sanda, 2007), but no
published research exists for the Nigerian stock market index and the five most
traded and the oldest stocks in recent years on the NSM. This paper aims to seek
evidence of the weak form market efficiency in the Nigerian stock market. In
order to achieve the objective, a set of complementary tests, namely
autocorrelation tests, runs and variance ratio tests are employed in this paper. The
data used for these tests primarily comprise daily and weekly observed returns of
the market index and five individual stocks listed on the market. Then, the data
are adjusted for thin (infrequent) trading that is a prominent characteristic of the
Nigerian stock market and that could seriously bias the results of the empirical
studies on market efficiency.

The rest of this paper is organized as follows, literature review in section two,
section three compresses of materials and methods while section four is the result
and discussion. The final section is section five, conclusion and
recommendations.

2.0 Literature Review and Theoretical Framework

The EMH, which plays an important role in the financial economics literature,
relies on the efficient exploitation of information by economic actors. Generally,
an asset market is referred to be efficient if the asset price in question must fully
reflect all available information. If this is true, it should not be possible for market
participants to earn abnormal profits. Based on the definitional statement of an
efficient market above, Fama (1970) suggested three models for testing stock
market: the Expected Return or Fair Game model, the Submartingale model, and
the Random Walk model.

2.1 The Fair Game Model

In general, the fair game model states that a stochastic process with the
condition on information set , is a fair game if it has the following property:

( | ) (2.1)
 CBN Journal of Applied Statistics Vol. 3 No.1 119

In the case of stock markets, Fama (1970) introduced a model of the EMH that is
derived from the Fair Game property for expected returns and expressed it in the
following equations:

( | ), (2.2)

with

( | ) [ ( | )] (2.3)

where is the excess market value of security at time , is the

observed (actual) price of security at time , and ( | ) is the expected
price of security that was projected at time conditional on the information set
or equivalently

( | ) (2.4)

with

( | )] [ ( | )] (2.5)

where is the unexpected (excess) return for a security at time ,

is the observed (actual) return for a security at time , and ( | ) is
the equilibrium expected return at time (projected at time t) on the basis of
the information set .

This model implies that the excess market value of security at time
( ) is the difference between actual price and expected price on the basis of
the information set It. Similarly, the unexpected (excess) return for a security at
time ( z) is measured by the difference between the actual and
expected return in that period conditioned on the set of available information at
time .

According to the Fair Game model, the excess market value and excess return are
zero. In other word, Equations (2.3) and (2.5) indicate that the excess market
value sequence { } and { } respectively are fair games with respect to
the information sequence { }.
120 Testing the weak-form efficiency market hypothesis:
Evidence from Nigerian Stock Market Gimba

2.2 The Submartingale Model

The Submartingale model is the Fair Game model with a small adjustment in
expected return. In this model, the expected return is considered to be positive
instead of zero as in the Fair Game model. The adjustment implies that prices of
securities are expected to increase over time. In other word, the returns on
investments are projected to be positive due to the risk inherent of capital
investment. The Submartingale model can be mathematically written as follows:

( ) (2.6)

( )
( ) (2.7)

This model states that the expected return sequence { } follows a

submartingale, conditional on the information sequence { }, which is
meaningless in forecasting stock prices, except that the expected return, as
projected on the basis of the information , is equal to or greater than zero (Fama,
1970). The important empirical implication of the submartingale model is that no
trading rule based only on the information set can have greater expected returns
than a strategy of always buying and holding the security during the future period
in question.

2.3 The Random Walk Model

According to Fama (1970) an efficient market is a market in which prices reflect

all available information. In the stock market, the intrinsic value of a share is
equivalently measured by the future discounted value of cash flows that will
accrue to investors. If the stock market is efficient, share prices must reflect all
available information which is relevant for the evaluation of a company’s future
performance, and therefore the market price of share must be equal to its intrinsic
value. Any new information, which is expected to change a company’s future
profitability, must be immediately reflected in the share price because any delay
in the diffusion of information to price would result in irrationality, as some
subsets of available information could be exploited to forecast future profitability.
Thus, in an efficient market, price changes must be a response only to new
information. Since information arrives randomly, share prices must also fluctuate
unpredictably. The Random Walk model can be stated in the following equation:

(2.8)
 CBN Journal of Applied Statistics Vol. 3 No.1 121

where:

: Price of share at time ; : price of share at time ;

: random error with zero mean and finite variance.

Equation (2.8) indicates that the price of a share at time is equal to the price
of a share at time plus given value that depends on the new information
(unpredictable) arriving between time and In other word, the change of
price, is independent of past price changes.

Fama (1970) argued that the random walk model is an extension of the expected
return or fair game model. Specifically, the fair game model just indicates that the
conditions of market equilibrium can be stated in terms of expected returns while
the random walk model gives the details of the stochastic process generating
returns. Therefore, he concluded that empirical tests of the random walk model
are more powerful in support of the EMH than tests of the fair game model.

The EMH can be more specifically defined with respect to the available
information set ( ) to market participants. 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. This section highlights these forms with their practical
implications.

2.4 The weak form of EMH

The weak form of EMH is the lowest form of efficiency that defines a market as
being efficient if current prices fully reflect all information contained in past
prices. This form implies that past prices cannot be used as a predictive tool for
future stock price movements. Therefore, it is not possible for a trader to make
abnormal returns by using only the past history of prices.

2.5 Semi-strong form of EMH

The semi-strong form of the EMH states that current market prices reflect all
publicly available information, such as information on money supply, exchange
rate, interest rates, announcement of dividends, annual earnings, stock splits, etc.
If by increasing the information set to include private information, it is not
possible for a market participant to earn abnormal profits, then the market is
referred as strong form of EMH. In other words, under the strong form of EMH
122 Testing the weak-form efficiency market hypothesis:
Evidence from Nigerian Stock Market Gimba

market prices of securities reflect all relevant information, including both public
and private information. The strong form of EMH implies that private information
(inside information) is hard to obtain for making abnormal returns because if a
market participant wants to have it, he/she has to compete with many active
investors in the market. It is important to note that an assumption for the strong
form is that inside information cost is always zero. However, this assumption
hardly exists in reality, so the strong form of EMH is not very likely to hold.

The empirical literatures on the weak form efficiency in emerging stock markets
by authors show conflicting result, some authors support while many others
oppose the efficient market hypothesis. The weak form of EMH implies that
current market prices of stocks are independent on their past prices. In other
words, a market is efficient in the weak form if stock prices follow a random walk
process. Therefore, tests of weak form efficiency are naturally based on an
examination of the interrelationship between current and past stock prices
(Fawson et al., 1996). Practically, several statistical techniques, such as runs test,
unit root test, serial correlation tests, and spectral analysis, have been commonly
used for testing weak form efficiency. Most studies on the weak form of EMH in
emerging stock markets have used the runs test and/or unit root test as a principle
method for detecting a random walk, a necessary condition for market efficiency
in the weak form. Specifically, the runs test is adopted by Sharma and Kennedy
(1997), Barnes (1986), Dickinson and Muragu (1994), , Karemera et al. (1999),
Wheeler et al. (2002), Abraham et al. (2002), and the unit root test was employed
by Groenwold et al. (2003), and Seddighi and Nian (2004) while Fawson et al.
(1996), Moorkerjee and Yu (1999), and Abeysekera (2001) conducted both
techniques in their study. A further test for market efficiency in the weak form
that has been applied by a number of researchers is the serial correlation test,
including the correlation coefficient test, Q-test, and variance ratio tests. Indeed, a
combination of correlation coefficient test (testing for significance of individual
serial correlation coefficient) and Q-test (testing for significance of a set of
coefficients) is adopted by Dickinson and Muragu (1994), Fawson et al. (1996),
Moorkerjee and Yu (1999), Abeysekera (2001), and Groenwold et al. (2003)
while , Dockery and Vergari (1997), ), Karemera et al. (1999), Alam et al. (1999),
Chang and Ting (2000), Cheung and Coutts (2001), Abraham et al. (2002), and
Lima and Tabak (2004) apply variance ratio tests as the main methodology to
determine the weak form of market efficiency in their study. Finally, a few
researchers use some other techniques, such as spectral analysis (Sharma and
Kennedy, 1977; Fawson et al., 1996), GPH (Geweke and Porter-Hudak) fractional
integration test (Buguk and Brorsen, 2003), and autoregressive conditional
 CBN Journal of Applied Statistics Vol. 3 No.1 123

heteroscedasticity (ARCH) test (Seddighi and Nian, 2004) in order to find

evidence for market efficiency.

Data obtained for testing weak form of EMH in emerging stock markets include
stock price indices and/or individual stock prices series. Specifically, stock price
indices are used in studies of Sharma and Kennedy (1997), , Fawson et al. (1996),
Dockery and Vergari (1997) Abeysekera (2001), Abraham et al. (2002), Lima and
Tabak (2004) also Mikailu and Sanda (2007), while individual stock prices are
employed by Dickinson and Muragu (1994), Olowe (1999), Wheeler et al. (2002).
Especially, Barnes (1986), Seddighi and Nian (2004) employed both kinds of
data for their tests in order to detect the weak form of market efficiency. Another
aspect of data used for testing weak form efficiency hypothesis in emerging stock
markets is frequency of time series. Based on this respect, the data consist of daily
(Mookerjee and Yu, 1999; Cheung and Coutts, 2001; Groenewold et al., 2003,
Lima and Tabak, 2004 and Seddighi and Nian, 2004), weekly (Dickinson and
Muragu, 1994; Dockery and Vergari, 1997; Abraham et al., 2002; and ), monthly
(Sharma and Kennedy, 1977; Barnes, 1986; Fawson et al., 1996; Olowe, 1999;
Karemera et al., 1999; and Alam et al., 1999) and even yearly time series (Chang
and Ting, 2000). Empirical findings derived from the studies in emerging stock
markets have been mixed. Indeed, some studies provide empirical results to reject
the null hypothesis of weak form market efficient while the others show evidence
to support the weak form of EMH. Regarding emerging European stock markets,
for instance, the empirical evidence obtained from Wheeler et al. (2002) fails to
support the weak form efficient hypothesis for the Warsaw Stock Exchange
(Poland). On the other hand, Dockery and Vergari (1997) document that the
Budapest Stock Exchange is efficient in the weak form. In addition, Karemera et
al. (1999) shows empirical evidence to support the null hypothesis of weak form
market efficiency for the stock market in Turkey. Surprisingly, in the perspective
of Africa, 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, Urrutia (1995) provides mixed evidence on the weak form efficiency for
the stock markets in Argentina, Brazil, Chile, and Mexico. Specifically, results of
the variance ratio test reject the random walk hypothesis for all markets while
findings from the run tests indicate that these markets are weak form efficient.
Consistent with the results reported by Urrutia (1995), 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. Moreover, Karemera et al. (1999) find that stock
124 Testing the weak-form efficiency market hypothesis:
Evidence from Nigerian Stock Market Gimba

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 (the others are not changed).

In the Southern part of Asia, Sharma and Kennedy (1977) and Alam et al. (1999)
report that the random walk hypothesis cannot be rejected for stock price changes
on the Bombay (India) and Dhaka Stock Exchange (Bangladesh) respectively.
However, Abeysekera (2001) and Abraham (2002) show evidence to reject the
hypothesis of weak form efficiency for stock markets in Sri Lanka, Kuwait, Saudi
Arabia and Bahrain, while Sanda (2009) used stock prices of 24 companies show
evidence to reject the hypothesis of weak form efficiency in the case of Nigerian
stock market. However, some recent studies on the EMH on the Nigerian Stock
Market shows that the hypothesis of the market efficiency not rejected; study by
Bashir (2009) using weekly returns for the 69 most actively traded shares over the
period 1995-2005. His paper tests the weak-form of the EMH using a battery of
tests including tests of autocorrelations and technical trading strategies. Overall,
the analysis indicates that the Nigerian market may be weak-form efficient for
ordinary investors who operate in a costly trading. According to Godwin (2010),
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 correlogram/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. Our own shall take a position whether or not to reject
EMH or not to reject, best on the data and the period of study.

3.0 Materials and Methods

The data used in this study primarily consist of daily and weekly price series of
the market index (NSINDEX) and the five oldest stocks listed on the Nigerian
stock exchange. Specifically, the market index, namely NSINDEX, is a composite
that is calculated from prices of all stocks traded on the STC while individual
stocks selected for this study are FIRSTB, UBA, UNIONB, CADBURY and
NESTLE. All data are obtained over the period from January, 2005 (the first
trading session in the year) to Dec., 2009 from the NSE, Kaduna branch. Then, a
 CBN Journal of Applied Statistics Vol. 3 No.1 125

natural logarithmic transformation is performed for the primary data. To generate

a time series of continuously compounded returns, daily returns are computed as
follows:

( ) ( ) ( ⁄ ) (3.1)

where and are the stock prices at time t and t-1.

Similarly, the weekly returns are calculated as the natural logarithm of the index
and the stock prices from Wednesday’s closing price minus the natural logarithm
of the previous Wednesday’s close. If the following Wednesday’s price is not
available, then Thursday’s price (or Tuesday’s if Thursday’s is not available) is
used. If both Tuesday’s and Thursday’s prices are not available, the return for that
week is reported as missing. The choice of Wednesday aims to avoid the effects
of weekend trading and to minimize the number of holidays (Huber, 1997).

3.1 Autocorrelation tests

The first approach to detecting the random walk of the stock returns summarized
here is the autocorrelation test. Autocorrelation (serial correlation coefficient)
measures the relationship between the stock return at current period and its value
in the previous period. It is given as follows:

∑ ( )( )
∑
(3.2)
( )

where is the serial correlation coefficient of stock returns of lag ; is the

number of observations; is the stock return over period ; is the stock
return over period is the sample mean of stock returns; and k is the lag of
the period. The test aims to determine whether the serial correlation coefficients
are significantly different from zero. Statistically, the hypothesis of weak-form
efficiency should be rejected if stock returns (price changes) are serially
correlated is significantly different from zero). To test the joint hypothesis that
all autocorrelations are simultaneously equal to zero, the Ljung–Box portmanteau
statistic (Q) is used. The Ljung–Box Qstatistics are given by:

QLB = N(N + 2)∑ (3.3)

is the jth autocorrelation and N is the number of observations. Under the null
hypothesis of zero autocorrelation at the first k autocorrelations (
126 Testing the weak-form efficiency market hypothesis:
Evidence from Nigerian Stock Market Gimba

), the Q-statistic is distributed as chi-squared with degrees of

freedom equal to the number of autocorrelations ( )

3.2 Runs test

The runs test is a non-parametric test that is designed to examine whether or not
an observed sequence is random. 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 (share returns), the total expected number of
runs (m) can be estimated as:

* ( ) ∑
M= (3.4)

where N is the total number of observations (price changes or returns) and is

the number of price changes (returns) in each category (N = ∑ ).

For a large number of observations ( ), the sampling distribution of is

approximately normal and the standard error of ( ) is given by:

∑ [∑ ( )] ∑
{ } (3.5)
( )

The standard normal Z-statistics that can be used to test whether the actual
number of runs is consistent with the hypothesis of independences is given by:

( ) (3.6)

where R is the actual number of runs, m is the expected number of runs, and 0.5 is
the continuity adjustment (Wallis and Roberts, 1956) in which the sign of the
continuity adjustment is negative (- 0.5) if , and positive otherwise. Since
there is evidence of dependence among share returns when R is too small or too
large, the test is a two-tailed one.
 CBN Journal of Applied Statistics Vol. 3 No.1 127

3.3 Variance ratio test

The variance ratio test, proposed by Lo and MacKinlay (1988), is demonstrated to

be more reliable and as powerful as or more powerful than the unit root test (Lo
and MacKinlay, 1988; Liu and He, 1991). The test is based on the assumption that
the variance of increments in the random walk series is linear in the sample
interval. Specifically, if a series follows a random walk process, the variance of its
q-differences would be q times the variance of its first differences.

( ) ( ) (3.7)

where is any positive integer. The variance ratio, ( ), is then determined as

follows:

( ) ( )
( ) (3.8)
( ) ( )

For a sample size of observations ( ), the formulas for

computing ( q) and (1) are given in the following equations:

∑ ( – )
(q) = (3.9)
where
( – )( ) (3.10)
and
= ∑ ) ( ) (3.11)

∑ ( – )
( ) (3.12)
( )

Under the assumption of homoscedasticity and heteroscedasticity increments, two

standard normal test-statistics, ( ) and ( ) respectively, developed by Lo and
MacKinlay (1988), are calculated by Equations (3.13) and (3.14):
( )
( ) ( ) (3.13)
( )

( )
( ) ( ) (3.14)
( )
128 Testing the weak-form efficiency market hypothesis:
Evidence from Nigerian Stock Market Gimba

where (q) is the asymptotic variance of the variance ratio under the assumption
of homoscedasticity, and (q) is the asymptotic variance of the variance ratio
under the assumption of heteroscedasticity:
( )( )
( ) (3.15)
( )
( )
(q) = ∑ () (3.16)

Where ( ) is the heteroscedasticity – consistent estimator and computed as

follows:

∑ ( ) ( )
() ∑
(3.17)
( )

4.0 Results and Discussion

4.1 Autocorrelation tests

To test the weak form of EMH for the Nigerian stock market, first the
autocorrelation tests with 12 lags are performed for daily weekly returns of the
NSINDEX and five individual stocks. The results of these tests are as summarized
in Table1.

4.2 Results for daily returns

The result shows that the autocorrelation tests for daily observed and corrected
returns for thin (infrequent) trading respectively. When the observed returns are
used, it is found that the null hypothesis of random walk is rejected for all studied
series (except UNIONB). Specifically, for the NSINDEX, it is evident that
autocorrelation coefficients are significantly different from zero with a positive
sign for 1st, 4th, 5th, 6th and 7th 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.
Especially, the results of the Liung-Box Q-test reveal that the autocorrelation
coefficients of all 12 lags are jointly significant at 1% level. Regarding the
individual stocks returns, it is observed that serial correlation coefficients are
significant at 1st , 4th , 5th , 6th and 7th lag for FIRSTB; at 1st , 2nd, 3rd and 6th for
CADBURY; at 1st , 7th and 10th lag for UBA and at 1st and 3rd lag for NESTLE.
Importantly, the results of Q-test fail to support the joint null hypothesis that all
 CBN Journal of Applied Statistics Vol. 3 No.1 129

autocorrelation coefficients of 12 lags are equal to zero for all individual stocks
return series in question.

The empirical results for the corrected returns, again reject the random walk
hypothesis for the Index and all selected individual stocks (except UNIONB).
However, the rejection of the null hypothesis is less pronounced for FIRSTB and
NESTLE when observed returns are corrected for thin 28. They are significantly
different from zero trading. Specifically, the joint hypothesis that all
autocorrelation coefficients are simultaneously equal to zero is only rejected for
some lags, not all 12 lags as in the case of observed returns presented above.

Table 1: Descriptive statistics for the NSINDEX and the individual stocks returns

NSINDEX FIRSTB UBA UNIONB CADBURY NESTLE

Daily returns
Observations 802 802 802 802 802 802
Mean 0.0001 -6.35E-05 0.0002 -0.0003 -6.28E-05 9.38E-05
Median -0.0003 0.0000 0.0000 0.0000 0.00000 0.0000
Maximum 0.0204 0.1811 0.1798 0.2168 0.2942 0.1447
Minimum -0.0206 -0.1811 -0.1798 -0.2117 -0.2942 -0.1567
Std. Dev. 0.0046 0.0138 0.0152 0.0196 0.0182 0.0110
Skewness 0.9 -2.8 -2.0 -1.3 -1.1 -0.8
Kurtosis 7.9 121.5 106.2 83.5 204.3 100.3
Jarque-Bera 800.7a 415,586.2a 314,917.0a 191,786.2a 1,196,997.0a 279,808.7a
Weekly returns
Observations 300 285 285 255 250 245
Mean 0.0016 0.0007 0.0014 0.0007 0.0016 0.0013
Median 0.0003 0.0000 0.0011 0.0011 0.0000 0.0000
Maximum 0.0840 0.0834 0.0853 0.1718 0.2850 0.1567
Minimum -0.0894 -0.1774 -0.1768 -0.2553 -0.3010 -0.1467
Std. Dev. 0.0189 0.0259 0.0240 0.0365 0.0376 0.0283
Skewness -0.4 -1.5 -2.0 -3.1 -0.97 -0.1
Kurtosis 8.0 13.6 17.8 26.4 36.97 11.0
Jarque-Bera 239.9a 1,129.9a 2,201.8a 5485.9a 10,808.3a 543.5a
a : Indicates that the null hypothesis of normality is rejected at the 1% significant lev

4.3 Results for weekly returns

Similar to the results for the daily observed returns, it is found that autocorrelation
coefficients of the weekly observed index returns are significant with a positive
sign at 1st , 2nd , 3rd , 4th , and 5th lags. Additionally, based on the Q-statistics, the
null hypothesis of no autocorrelation on the index returns for all lags selected is
strongly rejected at the one percent significant level.
130 Testing the weak-form efficiency market hypothesis:
Evidence from Nigerian Stock Market Gimba

Furthermore, results of the autocorrelation tests on weekly observed returns for

the individual stocks show significant autocorrelation coefficients at the first lags
for each individual stock returns series. Specifically, significant autocorrelation
coefficients are found at 1st , 2nd , and 4th lag for FIRSTB; at 1st , 2nd , 4th , and 5th
lag for UBA; at 1st and 2nd lag for UNIONB; at 1st , 2nd , 3rd , 4th , 5th and 7th lag
for CADBURY; and at 1st , 2nd , 3rd , and 5th lag for NESTLE. Once again, the Q-
statistics fail to support the joint null hypothesis that all autocorrelation
coefficients from lag 1 to 12 are equal to zero for all individual stocks observed
return series.

Further, the results of the autocorrelation tests for the corrected returns indicate
that the random walk hypothesis is also rejected for the market index and all
selected individual stocks, except FIRSTB. However, the extent of rejection is
less pronounced for these series, especially for the market index, UBA and
UNIONB, as the returns are adjusted for thin trading. 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
market index and all selected individual stocks (except UNIONB). When the
corrected returns for thin trading are used, the random walk hypothesis is also
rejected for the market index and four out of five selected individual stocks
although the extent of rejection is less pronounced.

4.4 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, (sess the Jarque-Bera test in appendix).
Specifically, the results of the runs test for daily observed returns, the results
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. Moreover, the
results of runs test based on the corrected returns also support the null hypothesis
of random walk for NSINDEX, FIRSTB, UBA and CADBURY. However, these
results fail to reject the null hypothesis for UNION and NESTLE. For the weekly
observed returns, the results indicate that the null hypothesis of independence
among stock returns is rejected for the market index and all selected individual
stocks, except UNIONB.
 CBN Journal of Applied Statistics Vol. 3 No.1 131

However, when the corrected returns are used, the results of the runs test reveal
that the null hypothesis cannot be rejected for UNIONB, but it is rejected for
FIRSTB and NESTLE. For the remaining series, the rejection of the null
hypothesis is unchanged, but the extent is less pronounced as compared with the
results for the weekly observed data.

In summary, the runs test provides evidence to reject the null hypothesis of
random walk for both daily and weekly observed returns of the market index and
all selected individual stocks (except weekly returns for UNIONB). However,
when the corrected returns are used, the empirical results obtained from the test
fail to reject the null hypothesis for UNIONB and NESTLE with the daily data
and for FIRSTB and NESTLE with the weekly one.

4.5 Variance ratio tests

This study employs variance ratio tests for both null hypotheses, namely the
homoscedastic and heteroscedastic increments random walk. In addition, the
variance ratio is calculated for intervals (q) of 2, 4, 8, 16 and 32 observations. The
results of the variance ratio tests are reported in Table

4.6 Results for daily returns

Empirical evidence obtained from the variance ratio tests for daily observed
returns indicates that the random walk hypothesis under the assumption of
homoscedasticity is rejected for all series. In the case of NSINDEX, for instance,
the Z-statistics suggest that the variance ratios are significantly different from one
for all values of q at the one percent level. Therefore, the null hypothesis of
random walk is strongly rejected for the market index series. Similarly, the
empirical findings reveal that the null hypothesis of random walk for all selected
individual stocks cannot be accepted for all levels of q at the one percent level of
significance. Moreover, the rejections of the random walk hypothesis under both
homoscedasticity and heteroscedasticity assumptions for all series do not change
even when the daily corrected returns for thin trading are used. Indeed, all the
test-statistics of Z(q) and Z*(q) are still larger than the critical statistic at one
percent level of significance.

4.7 Results for weekly returns

Results of the variance ratio tests on the weekly observed return data confirms
again that the null hypothesis of random walks under the assumption of
homoscedasticity is strongly rejected for all series at all cases of q. Indeed, all Z-
132 Testing the weak-form efficiency market hypothesis:
Evidence from Nigerian Stock Market Gimba

statistics are greater than the conventional critical value (1.96 for the five percent
level). In addition, the heteroscedasticity-consistent variance ratio test provides
consistent evidence that the null hypothesis of random walk cannot be accepted
for all weekly observed return series. Specifically, a comparison the Z*-statistic to
the conventional critical value reveals that the random walk hypothesis is rejected
at q = 2, 4, 8, and 16 for CADBUTY and FIRSTB, and at q = 2, 4, and 8 for
NSINDEX and NESTLE. Moreover, the evidence against the null hypothesis
under the assumption of heteroscedasticity in the case of UNIONB is weak
because only two rejections (q=2 and q=4) are reported. Further, when the
corrected returns are employed, similar results are obtained from the tests.
Specifically, the null hypothesis of random walks under the assumption of
homoscedasticity is strongly rejected for all series at all cases of q while the null
under the assumption heteroscedasticity cannot be accepted for all series at some
cases of q. The rejection of the null hypothesis is less pronounced for NSINDEX,
FIRSTB, CADBURY and NESTLE, but more pronounced for UBA and
UNIONB as compared with the results for the weekly observed returns.

On the basis of empirical evidence provided above, it can be concluded that the
null hypothesis of random walk is rejected for the market index and all selected
individual stocks. Moreover, thin trading is unlikely to affect the market
efficiency.

5.0 Conclusion and Recommendations

This paper first provides 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, are briefly
summarised. 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, this paper also
highlights 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.
 CBN Journal of Applied Statistics Vol. 3 No.1 133

On the basis of the theoretical and empirical literature that is reviewed in this
paper, the weak form of market efficiency for the market index and five selected
individual stocks is tested by using both daily and weekly return data for the
period from January 2007 to December, 2009 and from July, 2005 to December
2009. In addition, to deal with the problem of thin (infrequent) trading, which
would seriously bias the results of the empirical study on market efficiency, the
observed returns are corrected by using the methodology proposed by Miller et al.
(1994). Moreover, in order to test the weak form of EMH for the Nigerian stock
market, three different techniques are employed, namely autocorrelation, runs,
and variance ratio tests. The results obtained from the autocorrelation indicate that
the null hypothesis of random walk is conclusively rejected for the market index
and four out of five selected individual stocks, even in the case where the returns
are corrected for thin trading. In addition, the runs test shows evidence to reject
the null hypothesis of a random walk for both daily and weekly observed returns
of the market index and all selected individual stocks (except weekly returns for
UNIONB). However, when the corrected returns are used, the empirical results
given by the tests fail to reject the null hypothesis for the daily returns of
UNIONB and NESTLE and weekly returns for FIRSTB and NESTLE. Moreover,
the results of the Lo and MacKinley’s variance ratio test under both
homoscedastic and heteroscedasticity assumptions for both observed and
corrected returns fail to support the random walk hypothesis for the market index
and all selected individual stocks. In general, it can be concluded that the Nigerian
stock market is inefficient in the weak form. A question arises here is whether
investors can make abnormal profits by establishing a trading strategy on the basis
of past information. Motivated by this interesting question, further studies on the
issue of market efficiency are conducted.

The policy implications of this analysis are that the NSE, as an emerging market,
must be closely monitored to achieve an optimal maturity level. Greed and bad
choices should not take the place of risk management capacity and market
discipline. Investors must be aware that, in inefficient stock markets, heavy gains
are just as likely as heavy losses. Furthermore, the Securities and
Exchange Commission should take a leading role in regulating abnormal financial
activities. In the meantime, an inefficient market could suffer over inflated stock
prices, speculation, and insider trading, all potentially intensified by herding
behaviour. Several policy challenges need to be confronted to enhance the
efficiency of the NSE, including (and not limited to):
 Increase market activities through reduction in transaction cost and
increase in membership of the NSE.
134 Testing the weak-form efficiency market hypothesis:
Evidence from Nigerian Stock Market Gimba

 The NSE and SEC also need to strengthen their regulatory capacities to
enhance market discipline and investor confidence. This will involve
training personnel to enforce financial regulations, perform market
surveillance, analytical and investigative assignments.
 Establishing a stock exchange news service, which will be responsible for
early, equal and wide dissemination of price sensitive news such as
financial results and other information that are material to investors’
decision. This will ensure that participants and investors have equal access
to high quality and reliable information.
 Minimize institutional restrictions on trading of securities in the bourse.
This will make all other markets to flow as a deregulated market.

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Journal of Economics and Sustainable Development [Link]
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Vol.4, No.13, 2013

Stock Market Performance of Some Selected Nigerian

Commercial Banks amidst Economic Turbulence
Bamidele Adeboye Adepoju
Department of Business Administration and Entrepreneurship, Bayero University, Kano. Nigeria.
E-mail: bamadepj@[Link] & [Link]@[Link]

Abstract
The climate in which business and economic activities in general were conducted in the period 2007 to 2010
could best be described as traumatic. Yet the prevailing climate for the Nigeria’s banking industry was unique as
the global financial crisis coincided with the domestic banking crisis to generate economic turbulence. This
research is an attempt to appraise the performance of the stocks of a sample of Nigerian commercial banks over
the period 2007 to 2010 that was characterized by turbulence. This research is a survey employing an ex post
facto design for data collection. A sample of eight banks – four each from the first generation and the new
generation banks were selected using a multi-stage sampling procedure; a combination of stratified sampling
and purposive sampling techniques. Secondary data – the stock market prices, were collected from the Nigerian
Stock Exchange activity list. Data analysis involved both trend analysis and One-Way ANOVA. It was
consequently established that stock market performance of all the sampled banks declined especially from about
May 2008. Furthermore, the financially weak or troubled banks showed greater weakness in stock market
performance than the healthy ones. It was concluded that environmental threat to investment fortune might have
caused investors to lose confidence in the prospect for future growth which might have prompted them to reduce
their shareholdings. It was therefore recommended that government and agencies concerned with the
management of the national economy should be proactive in dealing with issues that might constitute potential
threat to investment interests.
Key Terms: Business Performance, Economic Turbulence, Global Economic Meltdown, Nigerian Commercial
Banks, Performance of Banks, Stock Market Price.

1. Introduction
Business performance is expectedly conditioned by the prevailing economic environment. Economic turbulence
is a negative development in the environment that has potential adverse consequences for business operations.
Economic turbulence is an unpredictable and swift changes in organization’s external and internal environments,
or in an economy, that affect its performance (Editor, 2009). As this source noted, the economy since the late
20th Century was considered a turbulent environment for business because of the rapid growth consequent to the
growth in technology and globalization, and the frequency of restructuring and merger activity. 2008 was
remarked to be an especially turbulent period for financial markets, when banks worldwide could not meet their
loans and had to receive government support in form of stimulus package in some countries including United
States of America, Ireland and Japan.
In a state of economic turbulence as Brown, Haltiwanger and Lane (2005) observe, every part or sector of the
economy experiences instability and uncertainty. While some firms are shutting down and others are starting up,
some jobs are being created and others are being destroyed, some workers are being hired and others are quitting
or being laid off. In such situation, there are key questions about the relationship between economic turbulence
and firm performance and survival.
The turbulence that has engulfed the global economy, as Metcalfe (2010) explained, does not have a single cause.
It emerged when several unrelated problems in different economic sectors and different countries became
interconnected and reinforced one another. Notably, the collapse of major banks like Lehman Brothers (the
largest ever bankruptcy) and Bear Stearns and seemingly safe financial institutions like AIG led to global credit
crunch and fears of more general and persistent economic problems. But underlying these events, there was an
enormous expansion of cheap credit. As the scale of excessive borrowing by consumers, businesses and
governments became apparent banks were forced to reveal losses running into billions from sub-prime loans,
reckless lending and gargantuan bonuses. In consequence, the global financial system was at risk of collapsing
like a house of credit cards. In 2007, as a result of the freezing of financial markets and the global credit crunch,
there was a threat of a world-wide depression. The Nigerian financial system of which the banking sector is only
a subsector or subset is also a constituent of the global financial system and so, such phenomenon as the Global
Financial Meltdown cannot but have some adverse consequences, howbeit indirectly on the operational results of
the Nigerian commercial banks.
Since the 1990s, the Nigerian financial system had witnessed a series of crisis which had caused the regulatory
authorities to institute a series of reforms (over the years) with a view to ensuring stability and avoid loss of

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public confidence in the banking institutions. Notably, some commercial banks became delinquent, and have had
to close shop (in fact liquidated) consequent to withdrawal of their operating license by the regulatory authorities;
a development that caused depositors as well as shareholders to lose their funds. The unforeseen development in
the global economy that manifested in a financial crisis introduced yet another dimension to the crisis in the
Nigerian banking industry. The situation was made worse by the collapse of the Nigerian capital market which
was also consequent to the global financial crisis. The effect was a slump in the market prices of the stock of
Nigerian firms. Thus, the nagging question is whether or not the stock of Nigerian banks have been affected by
the negative development in the Nigerian capital market, and if so, the extent to which it had any differential
effects on the stock prices of the respective commercial banks. The thrust of this research therefore, is to
ascertain the effects of the turbulence in the Nigerian economy on the prices of the stock of commercial banks
over the period 2007 to 2010.
The main objective of this research therefore, is to assess the stock market performance of the sampled
commercial banks over the period of economic turbulence more so, in the face of the global financial crisis and
the domestic or national crisis that engulfed the Nigerian banking industry and extended over the study period,
2007 to 2010. Specifically, this research has made an attempt to:
a. Examine the trend in the stock market performance of the sampled Nigeria’s commercial banks over the
study period.
b. Ascertain if there are differences in the stock market performance amongst eight commercial banks in
the study sample.

This research was not in any way an attempt to probe into the crisis that has over time, in a cycle,
engulfed the Nigerian banking system which necessitated the intervention of the regulatory authorities
in an attempt to stem the tide of looming bank failures. Furthermore, no attempt was made to explain if
the Global Financial Crisis had contributed towards aggravating the crisis and instability in the Nigerian
Financial System. This study was primarily intended to assess the performance of the stock of some
selected Nigerian Commercial Banks over the period, 2007 – 2010, which coincided with the era of the
Global Financial Crisis and undoubtedly exacerbated the turbulence in the Nigerian economy. The
primary intention was to ascertain if the performance of banks that had shown traces of distress and
possible failure (the financially threatened) were in any way different from the performance of banks
that were adjudged to be sound by the regulatory authorities.

1.1 Research Questions:

Based on the foregoing, the research has attempted to provide answers to the following:
i. What is the observable trend in the stock market performance of the sampled Nigerian commercial
banks over the study period?
ii. Are there differences in the stock market performance of the eight sampled banks?

1.2 Hypothesis:
The hypothesis that was tested is as follows:
There are no significant differences in the stock market performance of the eight banks in the study
sample.

2. Literature Review
2.1 Global Economic Meltdown
The global economic meltdown is an issue that has recently gained much of public attention, and generated
much discourse among scholars, researchers, practitioners in the field of economics, management and finance, as
well as public policy makers. The global financial crisis, otherwise known as the global economic meltdown as
Agbonifoh and Evbayiro-Osagie (2010) explained, is a worldwide financial and business situation that is
characterized by sudden, sustained and alarming credit squeeze, tumbling stock market prices, shrinking demand,
substantial job losses and rising prices and interest rates. Osaze posits that the economic meltdown is “the
continuous and dramatic drop in all economic indices over a relatively short period of time leading to corporate
failures, especially failures of financial institutions which provide the lubricants that oil the economy,
unemployment and general recession” (see: Agbonifoh and Evbayiro-Osagie, 2010:23).
Abdullah (2010) explained that the financial crisis which was initially referred to in the media as a “credit crunch”
or “c redit crisis”, began in July 2007 when a loss of confidence by investors in the value of securitized
mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into
financial markets by the United States Federal Reserve and the European Central Bank. It became prominently
visible in September 2008.

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Many experts and scholars have attributed the global financial crisis to myriad causes including excessive and
corrupt practices of subprime mortgage lending (which led to high mortgage default and delinquency rates in the
United States). Apparently, the Global Financial Crisis started in the United States of America and primarily
from her mortgage investments and the auto industry.
By June 2007, as Gbadamosi (2010) explained, the first sign that the United States was gradually entering into a
period of financial crisis emerged when two hedge funds owned by Bear Steam which had invested heavily in
the sub-prime market collapsed. Like a chain reaction, banks watched helplessly as securities they thought were
safe became tainted with what was known as toxic mortgages. Before the end of the year 2007, the rising number
of foreclosures helped to speed up the fall of housing prices, and the number of prime mortgages in default rose
considerably. Between September, 2008 and the summer of 2009, the credit squeeze which began some months
before had become Wall Street’s biggest crisis since the Great Depression of the 1930s. Like a hurricane, the
people and governments of United States watched as hundreds and billions of mortgage related investments sunk
leaving giant investment banks like Lehman Brothers and Merrill Lynch to collapse or reinvent themselves.
American International Group, CIT Group, auto giants like General Motors and Chrysler were few of the worst
hit firms in corporate America.
Oghojafor, Lawal and Adebakin (2010) declared that the Global Financial Meltdown is the worst financial crises
after the Great Depression of the 1930s. This position was corroborated by Ahiauzu and Asawo (2010) who
remarked that the increasing pressure (to change how they operate) faced by organizations over the globe much
of which stemmed from the volatility in the global economic environment, has deteriorated into what many
economic commentators have described as perhaps the worst global economic depression in human history. It
started in the United States of America in the fall of 2008 and spread rapidly to the advanced economies
(European Union), emerging markets (Asian Tigers) and the Less Developing Countries (e.g. Nigeria). It is thus
a global phenomenon that has contributed significantly to the decline in the various economies of the world; this
is manifested in failure of key business activities, reduction in international commitment, declining wealth,
foreign exchange and stock market index.
2.2 The Nigerian Banks in the Era of Global Economic Meltdown
The roots of the Global Financial Crisis are in banking rather than in securities market or foreign exchange
(Samaila, 2010). The crisis started in the U.S.A. (due to certain laxities in the U. S. A. financial system), spread
to Europe, and eventually became global. Even countries not initially affected by the financial crisis
subsequently had the “second-round effects” as the crisis becomes economic. In September 2008, what was
initially viewed as a credit crunch deepened; the stock markets world-wide crashed and entered a period of high
volatility, and this was followed by a considerable number of banking, mortgage and insurance company failures.
This development led to the situation to be described variously as global recession and later global financial
meltdown (Abdullah, 2010).
Remarkably, by the time the United States Government made arrangement for bailouts to rescue troubled banks,
and other companies in October, 2008, in order to stem rising unemployment and avert social disintegration, the
financial crisis had become a global phenomenon, first affecting many countries in Europe, East Asia, Latin
America, the Middle East and Africa. As the crisis deepened, stock markets plunged from one country to another
while some few countries had to be hurriedly pulled back from the brink of total economic collapse (Gbadamosi,
2010).
Osaze has argued that the economic meltdown began in Nigeria much earlier than the 2007 global reference date;
that it started with the failure of several Nigerian banks in the mid 1990s (see: Agbonifoh and Evbayiro-Osagie,
2010: 22)
2.3 The Global Economic Meltdown and the Stock Market
By definition, an economic meltdown is a generalized recession which has severe implications for various
sectors and sub-systems of the economy. One such sub-system is the stock market (Agbonifoh and Evbayiro-
Osagie, 2010). Ajakaiye and Fakiyesi (2009) insinuated that there were direct impacts of the crisis on Nigerian
finance and banking system. In the same vein, Okereke-Onyiuke (2009) attempted to paint a picture of the
effects of the Global Financial Crisis on the Nigerian Capital Market; declaring that Nigerian markets, although
not well integrated into the world market, have been facing serious destabilizing effects since the emergence of
the global financial crisis in July 2008. Between March 2008 and March 2009, the All-Shares Index of the
Nigerian Stock Exchange had lost a total share of 67%, while market capitalization had lost 62% of its value.
Concerns have thus been raised regarding how rapidly the global financial crisis penetrated the Nigerian capital
market, especially given that there is hardly any thriving domestic mortgage market.
From our assessment of the impact of the financial meltdown as Ahiauzu and Asawo (2010) elaborated, it
appears that it has among others, given rise to: (1) waning capital investment and declining markets for
manufacturers, (2) huge non-servicing loans leading to liquidity and solvency problems for financial institutions

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arising from lapses in financial regulatory structures, (3) fallen stocks prices that have threatened investments in
the capital market, and (4) the near collapse of the real estate market due to failed mortgage financing.
In the case of Nigeria, as Osaze puts it, some of the additional causes of economic meltdown include:
• Stock market bubble not driven by any fundamentals whatsoever
• Stock market trades driven by emotion
• High concentration of banks in the stock market with 60% of values
• Recapitalized banks too big for investment opportunities

The effect of the global financial meltdown on the Nigerian stock market has been a reduction of the market
capitalization from over N10.18 trillion to N5.2 trillion and a market index from 57,990 points to 22,000 points
by October 2009 and flight of foreign portfolio investment; stocks and shares were no longer usable as
collateral (see: Agbonifoh and Evbayiro-Osagie, 2010: 24).
Similarly, Osunkeye points out that the Nigeria’s stock market, consequent to the negative development in the
global economy, has witnessed a sustained decline in market capitalization from a high of N12.64 trillion on
May 3, 2008 to a low of N6.21 trillion on 31st December 2008. The loss of capitalization in 2008, which stood at
28.1 per cent of equities at the nation’s stock market, has been attributed to paucity of funds, fueled by the
emergent global financial crisis. This free-fall in the prices of equities was attributed to the withdrawal of foreign
investors from the market in reaction to the global financial crisis (see: Samaila, 2010: 57).
Ostensibly, as Agbonifoh and Evbayiro-Osagie (2010) noted, the ripple effects of the global financial crises
seem to have had a dramatic negative effect on the Nigerian stock market.
Thus, the global economic meltdown is a development that has had very negative effects on the activities of the
capital market as evidenced by the trend of the respective market indicators, volume and value of shares traded
on the Nigerian Stock Exchange as well as the all-share-index and market capitalization (Adepoju, 2010).
2.4 Performance of Banks in an Economy
Banks, in the view of Best (2005), play a vital role in a country’s macroeconomic and monetary policies as
vehicles through which currency and credit flow into a nation’s stream of commerce and financial system. It is,
as Adeyemi (2006) stressed, incontrovertible that the banking system is an engine of growth in any economy,
given the function of financial intermediation. Through the function of financial intermediation, banks facilitate
capital formation, lubricate the production engine turbines and promote economic growth.
The performance of the banking sector is critical to the survival and growth of the national economy and various
parameters could be used to ascertain the performance of individual banks. Primarily, a bank’s performance is
measured by its capacity to maximize returns on investor’s funds (Oyetayo and Oladipo, 2010). In the Nigerian
economy, bank performance is determined by a number of factors namely, lending rates, deposit rate,
management effects, ownership and control, market structure, etc. (Somayo and Ilo, 2009).
The need to institute reform in the Nigerian banking system cannot be dissociated from the performance of the
establishments in the industry. Invariably, the performance of the banks is more or less an evidence of the
efficiency or otherwise of the banking system. An issue of primary concern however, is the index for measuring
bank performance. In general, performance of corporate organizations is often associated with profitability,
banks play unique role in the economy and so, the soundness of a commercial bank is apparently a basis for
gauging the performance. As Sobodu and Akinyode (1998) noted, in recent times, the monetary authorities in
Nigeria have classified banks as healthy or distressed in an attempt to distinguish the performance of the
country’s banks. These scholars however, stressed that performance classification of banks has varied, with
researchers’ interests and banking systems reflecting why some studies used failed/non-failed classification as
against vulnerable/resistant classification. While some have represented ex post analysis, others have represented
ex ante analysis. Following the definition or selection of appropriate performance criteria and categorization,
financial ratios are often examined and analyzed under groups reflecting different operating characteristics of
banks. The popular categories include capital adequacy, asset quality, managerial efficiency (often used as a
proxy for management quality), earnings (profitability) and liquidity. This position was corroborated by the
Nigeria Deposit Insurance Corporation (2007) indicating that the parameters for assessment of the financial
condition of insured banks include asset quality, earnings and profitability, liquidity profile and capital adequacy.
Apart from financial information (derived essentially from financial ratios as Sobodu and Akiode (1998)
explained, other factors describing economic conditions, local market structure, demographic conditions and
capital market information have been incorporated into the analysis of bank performance. In this vein, Pettway
and Sinkey (1980), Shick and Sherman (1980) and Simmons and Cross (1991) found information on bond and
stock price movements of quoted commercial banks to be significant indicators of bank performance. Here, the
market price of stocks has been used as the parameter for gauging performance of banks.
3. Research Methodology

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This research is an ex post facto study in that the events that are observed have indeed taken place already and
the data are already in existence (Asika, 1991; Agbonifoh and Yomere, 1999). Secondary data were collected
from the Nigeria Capital Market specifically from The Nigerian Stock Exchange. The study population
comprised all public limited Nigerian commercial banks whose shares are quoted on the Nigerian Stock
Exchange over the period 2007 to 2010. The researcher decided to select a sample of eight (8) banks from
among all banks that were yet licensed by the Central Bank of Nigeria to carry out the business of banking in
Nigeria. The multistage sampling procedure was employed/adopted in a bid to ensure that banks that manifest
the phenomenon underlying the research were included in the sample (Beri, 2008; Mitchell and Jolley, 2007;
Francis, 2004; Bryman, 2010). First, using the stratified sampling procedure, all commercial banks were first
categorized into two: those that were threatened, that is, showing evidence of potential failure and those that
were adjudged to be financially sound by the regulatory authorities, the Central Bank of Nigeria (CBN) and the
Nigerian Deposit Insurance Corporation (NDIC). Banks in each of the two categories were subsequently further
classified into (a) First Generation Banks – that is, banks that had been licensed and carrying on the business of
banking in Nigeria before the 1980s and (b) the New/Second Generation Banks, those banks that were
established in the 1980s and thereafter. Consequently, using a purposive or judgmental sampling procedure
(Babbie, 1973; Beri, 2008), two (2) banks that are in the First Generation and two (2) that are in the New or
Second Generation categories were selected from each of the banks categorized as troubled or threatened and
those categorized as sound, respectively. In effect, four banks each were selected from among the troubled and
sound banks respectively for inclusion in the study sample. The four banks selected from among the category of
troubled banks are Oceanic Bank, Intercontinental Bank, Afri Bank and Union Bank. Similarly, the four banks
from among those considered financially sound that were in the sample are GT Bank, Zenith Bank, FBN and
UBA.
Data were thus collected from secondary sources; from the Nigerian Stock Exchange (NSE) Daily Activity
Summary for the relevant/study period. A decision was taken to select a day in the month to represent each
month. In order to minimize the possible demand pressure (on the stock market) that might arise at month’s end
when salaries and wages are paid, the researcher decided to use the stock market data for the first (1st) trading
day from the 15th day of each month.
Consequently, data for the stock market prices of the sampled commercial banks were collected monthly for the
period January 2007 to September 2010 extending over forty five months. The time series data were
subsequently analyzed using linear graph for trend analysis in order to facilitate visual comparison, and One-
Way Analysis of Variance was used to test each of the hypotheses with a view to ascertaining if differences exist
in the stock market performances amongst the commercial banks that were sampled for this research. The
hypotheses were tested at the 95 percent level of confidence (that is p< .05).

The Results:
The stock market prices of the eight companies (commercial banks) in the study sample that were collected from
the Nigerian Stock Exchange over the study period are presented below in table 1.

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Table 1: STOCK MARKET PRICES JAN. 2007- SEPT. 2010

S/NO OCEANIC INTER AFRI UBN GTB ZENITH FBN UBA
1 16.61 16.15 11.51 25.27 19.90 27.20 32.92 28.35
2 19.53 19.41 11.51 29.99 27.78 33.97 41.01 37.99
3 19.53 21.89 11.51 29.90 31.45 35.99 37.99 37.99
4 19.53 26.05 11.51 35.15 36.91 40.5 40.40 37.99
5 19.53 25.24 11.51 31.40 26.99 49.88 40.40 37.99
6 32.00 27.90 11.51 43.20 37.61 58.50 40.40 45.01
7 27.00 26.90 13.31 39.91 36.60 64.00 40.40 54.80
8 29.99 25.00 36.89 43.82 31.49 65.90 50.52 54.90
9 28.50 24.70 30.49 40.50 31.72 45.99 41.00 54.99
10 32.50 26.80 30.49 44.21 30.52 45.48 40.00 53.99
11 29.43 29.99 30.49 50.33 32.55 46.09 40.01 55.01
12 28.86 37.00 30.49 39.01 30.28 46.09 41.95 44.90
13 28.28 41.00 30.49 42.78 34.00 46.09 43.06 49.60
14 29.51 42.49 26.33 44.04 36.36 49.11 50.45 49.81
15 27.88 44.20 25.89 43.22 37.00 50.00 46.19 48.20
16 29.01 45.62 24.20 40.08 34.85 49.95 43.00 54.30
17 28.95 45.57 26.28 39.00 33.85 48.99 43.94 58.00
18 25.69 42.75 24.20 36.80 26.60 44.50 39.95 35.00
19 23.70 31.00 24.95 36.76 26.15 41.60 44.45 32.60
20 19.60 25.50 23.65 42.00 23.00 39.89 27.80 28.28
21 20.64 27.02 30.56 42.00 23.34 37.83 30.35 27.81
22 18.16 22.63 20.33 39.18 19.38 33.21 25.16 23.07
23 13.56 14.90 15.33 20.70 18.48 30.00 29.01 19.37
24 9.78 9.16 11.00 14.54 11.08 17.15 17.32 11.56
25 9.13 9.20 7.26 13.50 11.86 17.95 18.99 11.10
26 6.37 7.58 9.30 13.85 8.83 15.40 17.49 9.05
27 6.30 6.02 6.10 11.20 10.16 12.95 15.74 8.00
28 6.08 7.19 5.00 10.84 10.00 12.85 14.02 8.50
29 8.67 9.89 6.41 14.38 10.06 20.56 17.00 13.69
30 9.45 13.65 9.59 20.13 13.12 17.00 24.15 15.10
31 6.01 8.00 6.62 15.22 13.94 13.22 19.86 11.78
32 4.94 6.93 5.22 12.60 12.58 12.39 14.16 11.77
33 2.99 4.41 3.67 7.22 12.32 12.00 14.04 11.21

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S/NO OCEANIC INTER AFRI UBN GTB ZENITH FBN UBA

34 3.58 3.88 3.53 8.01 14.50 14.22 14.96 12.91
35 2.06 1.90 1.61 6.77 16.20 14.12 15.00 11.99
36 1.53 1.56 1.72 5.19 15.00 13.50 14.05 11.04
37 2.45 2.34 2.60 6.38 16.79 15.80 14.30 10.99
38 2.30 2.11 2.88 6.09 18.10 15.87 14.95 13.01
39 2.36 2.30 2.59 6.70 19.10 17.83 15.60 14.00
40 2.09 2.02 2.94 5.85 23.30 14.72 16.50 16.65
41 1.74 1.93 2.32 5.35 16.55 15.21 15.00 12.74
42 1.61 1.50 1.90 5.20 16.99 13.20 13.95 11.10
43 1.67 1.80 1.72 4.88 17.10 12.50 13.20 10.00
44 1.64 1.63 1.92 5.00 17.23 13.79 12.99 10.34
45 1.22 1.49 1.53 3.87 14.79 12.18 11.90 9.00
Mean 14.71 17.69 13.57 24.04 22.36 30.11 27.90 27.23
Standard
Deviation 11.22 14.58 10.96 15.76 9.17 16.76 13.08 17.60
Source: Compiled from the records of Nigerian Stock Exchange

Consequently, the trend analysis of the stock market prices of the Four Troubled Banks is presented graphically
below in Figure 1:

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The linear graphs for the stock market prices of all the four commercial banks categorized as financially troubled
(Oceanic Bank, Intercontinental Bank, Afri Bank and Union Bank), apparently move in the same direction over
the study period, 2007 to 2010. This is an evidence that the stocks of the four banks showed some similarities in
their price movement although the dimension and or magnitude of the undulation of the respective linear graphs
varied somewhat. It could however be deduced that the turbulence in the economy had little or no effect with
regards to the direction of the movement of the market prices of the stocks of banks that were considered to be
financially troubled. It should be noted that there was a general decline in the prices of stocks of this category of
banks which became particularly noticeable since September, 2008.
Similarly, the trend analysis of the stock market prices of the Four Banks adjudged to be financially sound is
presented graphically in Figure 2 below:

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Figure 2: Trend Analysis Showing Stock Market Prices of four of the Banks Adjudged Financially Sound
(January 2007 – September 2010)
The linear graphs depicting the movement of the stock market prices of the four banks in the study sample that
were adjudged as financially sound namely, GT Bank, Zenith, FBN and UBA also moved in the same direction
as those in Figure 1. The negative slope (that is, the downward trend) is perhaps an evidence of the telling effects
of the unfavourable developments in the economic environment. The decline in the stock market prices became
more severe from about May 2008. This of course, is a confirmation of the depressed situation in the Nigeria’s
capital market, an after mirth of the global financial crisis. Remarkably however, the prices of the stocks of the
commercial banks that were believed to be healthy are at least relatively higher than those of banks that were
considered threatened or financially troubled.
4.1 Test of Research Hypothesis
The research hypothesis was tested to ascertain the equality of the means of the stock market prices of the eight
banks sampled for the study using One-Way Analysis of Variance (ANOVA). The result was F = 9.099; df =
7/352 which was significant at P < .001. The hypothesis was thus rejected. This result suggests that the mean of
the stock market prices for the sampled banks are not equal. In other words, there are differences in the stock
market performance of the eight commercial banks surveyed. Furthermore, the post hoc analysis and Tukey HSD
test were performed in order to ascertain the difference by pairs for multiple comparison (Mitchell and Jolley,
2008). The results showed that there were differences in the stock market performance: (a) between UBN on the
one hand and Oceanic (p<.034), Afri Bank (p<.010); (b) between Zenith on the one hand and Oceanic (p<.000),
Intercontinental Bank (p<.001), Afri Bank (p<.000); (c) FBN on the one hand and Oceanic (p<.000),
Intercontinental (p<.013), Afri Bank (p<.000); (d) UBA on the one hand and Oceanic (p<.001), Intercontinental
(p<.028), Afri Bank (p<.000). The Tukey test thus confirms the existence of differences in stock market
performance among the sampled commercial banks particularly between each of UBN, Zenith, FBN and UBA
and Oceanic, Intercontinental and Afri Bank respectively.
Since four of the banks in the sample were classified as threatened or financially troubled/distressed while the
other four were in the financially sound category, the researcher felt that the analysis should be carried further to
ascertain if there was equality in the mean market performance of stocks in each of the two categories. Hence, a
test for equality of the stock market prices amongst the four of the sampled banks that were considered troubled

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or threatened, using One-Way Analysis of Variance. The result was F = 5.608; df = 3/176 which was significant
at p<.001. This result suggests the existence of differences in the stock market performance amongst the four
troubled banks. Post hoc analysis and Tukey HSD test revealed that there are differences in stock market prices
of UBN on the one hand and Oceanic (p<.006), and Afri Bank (p<.001) on the other hand. This result is
consistent with what was obtained via the test of the research hypothesis.
Similar analysis was done to ascertain if any equality exists in the stock market prices of commercial banks that
were adjudged to be financially healthy by the regulatory authorities. The results of the One-Way Analysis of
Variance (ANOVA) was an F = 2.271; df = 3/176 which was not significant at p<.05. There were therefore no
significant differences in the stock market performance of sampled banks that were classified as financially
healthy.
The researcher thought the analysis should be carried much further to ascertain if commercial banks that were
categorized as belonging to the New Generation manifest equality in the means of their stock market prices. In
order to accomplish this, two banks, Oceanic and Intercontinental were selected from among the troubled banks
while GTB and Zenith were selected from among banks that were considered to be financially healthy. The four
banks belong to the New Generation category. The results of the One-Way Analysis of Variance was F = 11.537;
df = 3/176 which was significant at p<.001. Post hoc analysis and Tukey test results showed that there were
differences in the stock prices between: (a) GT Bank and Oceanic Bank (p<.034) and (b) Zenith Bank on the one
hand and Oceanic (p<.000), Intercontinental (p<.000), GTB (p<.031) respectively. The results are consistent
with the results of the test of the research hypotheses except for the fact that differences in the stock market
prices of Zenith and GTB was rather astounding.
Similarly, the analysis was carried out to ascertain if commercial banks that were classified in this study as
constituting the First Generation Banks have equality in the means of their stock market prices. In this regard,
two banks, Afri Bank and UBN from among those categorized as troubled and two from among those regarded
as financially healthy, FBN and UBA were selected. All the four banks are in the First Generation category. The
results of One-Way ANOVA was an F = 9.306; df = 3/176 which was significant at p<.001. The post hoc
analysis and Tukey test results showed that there were differences in the stock prices between: (a) UBN and Afri
Bank (p<.004), (b) FBN and Afri Bank (p<.000), and (c) between UBA and Afri Bank (p<.000).

4. The Implications of the Findings

Prices of corporate stocks including commercial banks are determined by market forces of demand and supply.
Even though the banking sector has consistently dominated trading activities on the NSE before, during and even
since the global financial crisis, the trend analysis of the stock market prices for all the eight sampled
commercial banks regardless of whether they were considered troubled or financially healthy generally declined
over the study period especially between May 2008 and September 2010. The observed decline might be
consequent to the reaction of investors to development in the domestic economy which was perhaps reinforced
by information on what looked like a looming disaster in the global economy – the possible spill-over effect of
the global financial crisis. These forces were sufficient to cause investors to see the future as rather gloom.
Hence, decisions might be taken to reduce the size of their investment in corporate stocks (especially by
reducing the size of their holdings) and this might contribute significantly to the plunge in the stock prices.
Remarkably, the decline in the stock market prices was more severe for the commercial banks that were troubled.
Furthermore, the results of the tests of the research hypothesis glaringly revealed that the differences in stock
market performance were between the banks adjudged by the regulatory authorities as financially sound/healthy
on the one hand and those considered as troubled on the other hand. It would therefore not be out of place to
presume that investors most probably had a loss of confidence in the future prospects of the troubled banks in
particular. Hence, the depressed state of the Nigeria’s capital market had a spill-over effect on the banking
industry.
Some critical questions that seem to beg for answers are: Are firms vulnerable to economic downturn?; Could
poor or declining performance be attributed or associated to unexpected development in the macro environment
such as the global financial crisis? No attempt has been made in this study to provide definite answers to these
questions. However, Clessens, Djankov and Xu (2000) in their study of corporate performance in the East Asian
Financial Crisis, concluded by declaring that “it appears that firm-specific weaknesses already in existence
before the crisis were important factors in the deteriorating performance of the corporate sector”. In their view,
industry-specific shocks and the institutional environment also contributed to the decline in profitability, and
financing patterns had a strong influence on operational performance. Notably, the Nigerian banking industry
was already experiencing difficult times before the global crisis; the global economic phenomenon only served
to escalate the crisis in the financial sector.

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5. Conclusions and Recommendations

The findings of this research tend to suggest that the fear of the uncertainty that beclouded the fortune of
investment in shares of commercial banks was most likely a factor that has lead to the slump in the market
performances of shares of commercial banks. Given an understanding of the fact that an average investor would
be concerned about the stability of the investment environment and would most likely desire to minimize the risk
associated with his investment, there is the need for managers of the economy to constantly scan the
environment and monitor developments in such a way as to reduce environmental threats to investment security
to the barest minimum. In this regard, developments in the global economic environment should not be taken for
granted or assumed to be of little or no consequence to the national economy. There is thus the need for the
government and relevant agencies (concerned with the management of the national economy) to be proactive
rather than being just reactive.

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 Journal of Science, Engineering and Technology, Vol. 7 (1), March 2020: pages 1-10

MACROECONOMIC VARIABLES AND VOLATILITY OF STOCK PRICE

RETURNS IN NIGERIA

Omini, E. E1; Ikpan, O. I2; Edet, E. B3.

1 2
, : Department of Statistics, Cross River University of Technology, Calabar, Nigeria
3
: Department of Statistics, University of Calabar, Nigeria
1
: emmanuelomini74@[Link]
2
: ikpanlouis@[Link]
3
: crazystatistics93@[Link]

ABSTRACT
This research work analyzed stock market returns and their interplay with three
macroeconomic variables – inflation rate, exchange rate and an additional factor known as
the crude oil price for the period 2006 – 2019 using daily data of three selected stocks from
First Bank, Zenith Bank and the Nigeria Brewery. We used time series models to investigate
which of the macroeconomic variables affect stock market volatility more than others. The
study determined the response of the stock returns to changes in each of the macroeconomic
variable on the volatility of the stock returns in Nigeria stock prices. Data were sourced from
three selected sources. The result for fitness revealed that EGARCH (1,1) GED outperformed
other models with the highest log likelihood (LL) and the least Root mean square error
(RMSE) compared to other competing models: this is concerned with the Nigeria Brewery.
While the result for fitness and accurate forecasting based on First Bank stock revealed that
EGARCH-GED performed better than other models. TARCH (1,1) std in terms of accuracy
in forecasting displayed superiority over other competing volatility models with the least
root mean square error (RMSE). Result also revealed that; fitness and accurate forecasting
of volatility models with the presence of macroeconomic variables performed better than the
absence of these variables.

Keywords: Macroeconomic, Volatility, Stock returns, Crude oil price, Exchange rate

INTRODUCTION stock market and these factors make investors

A stock market which is established well and to choose the stock because investors are
with huge capital trading over here is interested to know about the factors affecting
providing a number of opportunities of saving the working of stock to manage their
and investing to its investors. The main portfolios. Abrupt variations and unusual
objective behind the establishment of stock movements of macroeconomic variables
market is to make an easy process for savers cause the stock returns to fluctuate due to
and borrowers, as it takes savings from uncertainty of future gains.
different groups and provide them a stand to
change these savings into successful Volatility of stock price is a form of market
investments. A stock market plays its key role efficiency (Hameed and Ashraf, 2006), which
for the reallocation of funds in multiple sectors is the reaction to the incomplete information
of an economy. It works as such a stand where in the market (i.e. uncertainty). If prices of the
many variables collectively move together to stocks move up and down rapidly then there
make the economy of any country well would be high volatility existing in the market.
groomed. The macroeconomic factors have If there are almost no changes in prices then
important concerns with stocks traded in the there exists low volatility. Prices of stock

1
Journal of Science, Engineering and Technology, Vol. 7 (1), March 2020

exhibit fairly low volatility in Nigeria capital made substantial improvement on modeling
market. This unpredictability of returns makes the volatility which is changing with time.
the stock a more risky investment. As a result,
investors demand higher return for the Basically this study is conducted to analyze
increased risk. Companies with high volatility the macroeconomic variables and volatility as
stocks need grow profitably, showing a it is related to stock returns in Nigeria. The
sudden increase in earnings and stock price three variables considered in this work are the
over the time, or paying very high dividends. exchange rate, inflation rate and crude oil
Volatility is the amount of fluctuation in stock price. These macroeconomic fundamentals are
prices (Malkiel&Xu, 1997). chosen through the extensive literature upon
the variables and their relationship with stock
Arouri et al (2011) examined the transmission market returns.
of volatility and the return between stock
market and the prices of oil in the countries The investors in stock market invest their
that make up the Gulf Cooperation Council savings with the hope of earning some income.
(GCC) between the periods of 2005-2010. The This income is called “Stock returns” which
methodology which is empirical was applied sometimes comes as profits realized from the
to discover the spillovers of volatility within buying and selling of shares in the stock
the market. This is called Multivariate market or receiving of dividends. These
Economic Technique. VAR moving average dividends may be given to the shareholders
generalized autoressive conditional from the profit earned, sometimes quarterly,
heteroskedasticity (VAR-GARCH). yearly and half yearly etc.

The result was found to have volatility The stock returns and even the stock prices are
spillovers that is significant between stock often affected by different risks emanating
markets and oil in only three out of six GCC within a country. Events happening across the
countries with transmission of volatility being world are not left out as they affect stock
very clear to stock market from oil. returns.

According to Hassan et al (2017) a viable The impact of economic variables in stock

economy is an indication of a very strong returns and their influence on asset price was
exchange rate. While a very weak and explored by Chen et al (1986). Islam (2003)
vulnerable economy is a reflection of a very investigated the relationship between the
weak currency. Instability of exchange rate industrial productivity and macroeconomic
has economic shocks as price levels are indicators (inflation rate, interest rate, the
negatively affected, profits made by firms industrial productivity and exchange rate).
decline and slows down the entire economic
activities. Also, crucial roles in developing the Stock Market Returns are subject to market
economy of every nation is played by stock risks and are not always fixed. They may
market. Stock markets are mechanisms where sometimes be negative or positive. They are
savings can be mobilized and distributed not homogeneous and can change depending
adequately across the various sectors of the on the risk one is prepared to take from
economy with a view of realizing inclusive investor to investor and according to the stock
growth. Stock markets play other roles like; market analysis. On the contrary to the fixed
boosting the confidence of investors in both returns brought by bonds, the stock market
the entire economy and financial institutions, return in nature are variables. The primary
it provides viability and strength of the sectors objective about stock returns is to sell high
of production, capital investment, provision after buying cheap. Risk is an integral part of
are made to firms to access and have adequate this market and speculations that are wrong
and needed capital with ease. This study has can be seen by investors as negative returns.

2
E. E. Omini et al.: Macroeconomic Variables and Volatility of Stock Price Returns in Nigeria

OBJECTIVES OF THE STUDY COMPUTATION OF RETURNS

The objectives of the study include; FROM DAILY CLOSING PRICE
i. To determine the effect of 𝑃
𝑟𝑡 = log (𝑃 𝑡 ) , 𝑡 = 2, … 𝑛 1
macroeconomic variables like 𝑡−1

inflation rate, exchange rate and crude

oil price on volatility of stocks. Where;
ii. To determine the best volatility 𝑃𝑡 = the closing price at day 𝑡
model amongst the competing (Present day)
models in (i). 𝑃𝑡−1 = the daily closing price at the
iii. To compare the performance of 𝑡 − 1 (Previous day)
volatility model in (i) in terms of 𝑛 = number of observations
fitness and forecasting.
The three selected stocks are; MODIFIED GARCH (1,1) MODEL
i. Zenith Bank WITH MACROECONOMIC
ii. First Bank of Nigeria INDICATORS AND CRUDE OIL
iii. Nigerian Brewery PRICE EFFECT.
2 2
While the three macroeconomic variables 𝜎𝑡2 =∝0 + ∝1 𝑈𝑡−1 +∝2 𝜎𝑡−1 + 𝛽1 ∆𝐼𝑁 𝑅 +
considered in this research are 𝛽2 ∆𝐸𝑋 . 𝑅 + 𝛽3 ∆𝐶𝑜𝑃𝑡
i. Inflation rate 2
ii. Exchange rate
iii. Nigeria crude oil price Where;
∆𝐼𝑁 𝑅 = Change in inflation
METHODOLOGY rate
This study adopted the computation of daily ∆𝐸𝑋 . 𝑅 = Change in Exchange
returns from daily closing prices from rate
Cashcraft Asset Management Limited. The ∆𝐶𝑜𝑃𝑡 = Change in Crude
study also focuses on the normality of Oil Price
returns series, stationarity test for the daily The approach to estimate the parameters of
return series, test for the presence of 𝛼0 , 𝛼1 , 𝛼2 , 𝛽1 , 𝛽2 , 𝛽3 is the maximum
heteroscedasticity. Also, in this study likelihood estimation (M.L.E).
methodology of estimation model
parameters, measures of fitness as well as We are going to use the excel solver to obtain
measure of forecasting performance of the parameters 𝛼0 , 𝛼1 , 𝛼2 , 𝛽1 , 𝛽2 , 𝛽3 . We can
Volatility will be discussed. maximize these parameters by calculus.

Study data LOG LIKELIHOOD (LL) IMPLIES

Data used in conducting this study were the NATURAL LOGARITHM OF THE
daily closing price of Zenith Bank LIKELIHOOD.
(1/03/2006 to 3/22/2019), First Bank I (𝜃, 𝜀) = In (L (𝜃, 𝜀)) 3
(1/03/2006 to 3/22/2019) and Crude oil Why the log is taken? Logarithm transforms
price 1/03/2006 3/22/2019). All covered a a product of densities into a sum for
period of 14 years. These data were convenience.
accessed through the official website of
cashcraft which is one of the leading stock SCHWARZ INFORMATION
broking firms in Nigeria CRITERION
([Link]) Among models of a finite set, SIC provides a
criterion for model selection. The model that
has the least SIC is considered.

3
Journal of Science, Engineering and Technology, Vol. 7 (1), March 2020

HANNAN – QUINN INFORMATION MEAN ABSOLUTE ERROR (MAE)

(HQN) CRITERION Measures how close predictions or
HQN measures the goodness of fit of a forecasts are to the eventual outcomes
statistical model. Often it is used as a criterion 𝑛 𝑛
1 1
for model selection. It relates to Akaike MAE = 𝑛 ∑ |𝑓𝑖 − 𝑦𝑖 | = 𝑛 ∑ |𝑒𝑖 |
Information Criterion (AIC) but not related to 𝑖=1 𝑖=1
log likelihood function (LLF). 4
Where;
ROOT MEAN SQUARE ERROR 𝑓𝑖 = the prediction
(RMSE) 𝑦𝑖 = the true value
This error compares a predicted value and
an observed value. RESULTS
Fitness and Forecasting Accuracy of
GARCH (1, 1), EGARCH (1, 1), TARCH
(1, 1) and ARCH (1) Based on Nigerian
Brewery Stock

4
E. E. Omini et al.: Macroeconomic Variables and Volatility of Stock Price Returns in Nigeria

Table 1 presents performance evaluation result of the model based on fitness and forecasting accuracy. For fitness performance, LL, AIC, SIC and
HQn were used while forecasting accuracy was based on the Root Mean Square Error (RMSE).

Table 1: Fitness and forecasting accuracy and diagnostic checking for the different volatility models for Nigerian Brewery stock
Volatility models LL AIC SIC HQn E stat P-value RMSE MAE
GARCH(1,1) Normal 10256.08 -6.3392 -6.3166 -6.3310 0.1112 0.1114 0.010133 0.006810
Std 10318.30 -6.3770 -6.3526 -6.3683 1.4239 0.0996 0.010131 0.006788
GED 10715.79 -6.6230 -6.5986 -6.6143 0.0375 0.8466 0.01014 0.006785
TARCH (1,1) Normal 10494.76 -6.486 -6.4618 -6.4775 0.3352 0.9718 0.010151 0.006785
Std 10321.76 -6.3786 -6.3522 -6.3691 1.2934 0.1713 0.010133 0.006780
GED 10.495.71 -6.4862 -6.4599 -6.4768 0.6132 0.8039 0.010150 0.006799
EGARCH(1,1) Normal 10519.71 -6.50167 -6.4772 -6.4929 0.3477 0.8840 0.010138 0.006780
Std 10744.20 -6.6400 -6.6136 -6.6305 0.7658 0.3816 0.010136 0.006753

GED 10717.35 -6.6234 -6.5970 -6.6139 0.7622 0.4221 0.010141 0.00675

ARCH(1,1) Normal 10417.35 -6.4400 -6.4193 -6.4325 0.6665 0.4143 0.010135 0.006763
Std 10522.64 -6.5041 -6.4815 -6.4960 1.2241 0.2687 0.0101134 0.006753
GED 10450.32 -64594 -6.4368 -6.4513 1.4223 0.1636 0.010135 0.006752
Bolded values are the highest LL, least AIC, SIC, HQn and RMSE
Source: Researcher’s Computation, 2019

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Journal of Science, Engineering and Technology, Vol. 7 (1), March 2020

Fitness and Forecasting Accuracy of EGARCH (1, 1), TARCH (1, 1), GARCH (1, 1) and ARCH (1) based on First Bank Stock
Table 2 presents the result of the fitness and forecasting accuracy of EGARCH (1, 1), TARCH (1, 1), GARCH (1,1) and ARCH (1) based on First
bank stock.

Table 2: Fitness and forecasting accuracy and diagnostic checking for the different volatility models for First bank stock
Volatility models LL AIC SIC HQn E stat P-value RMSE MAE
GARCH(1,1) Normal 8880.579 -5.5067 -5.4841 -5.4986 0.2348 0.6280 0.013478 0.008525
Std 9477.430 -58767 -5.8522 -5.8679 0.18045 0.6710 0.013468 0.008489
GED 8962.741 -55571 -5.5326 -5.5483 0.2014 0.6536 0.013473 0.008503
TARCH (1,1) Normal 8821.319 -5.4693 -5.4448 -5.4605 0.20776 0.6486 0.013476 0.008529
Std 9527.347 -5.0971 -5.8807 -5.8976 0.14217 0.7062 0.013500 0.008497
GED 88.36469 -5.4781 -5.4517 -5.4686 0.2038 0.6517 0.013476 0.008532
EGARCH(1,1) Normal 9756.755 -6.0501 -6.0256 -6.04135 0.016881 0.8966 0.013477 0.008494
Std 10213.02 -6.3328 -6.3064 -6.3234 0.10441 0.7466 0.013486 0.008477

GED 10233.38 -6.34547 -6.3191 -6.3360 0.0022 0.9630 0.013486 0.008476

ARCH(1,1) Normal 9630.300 -5.9729 -5.9521 -5.9654 0.0923 0.7613 0.013504 0.008596
Std 9808.025 -6.0826 -6.0600 -6.0745 0.09967 0.7523 0.013469 0.008494
GED 9459.03 -5.8659 -5.8433 -5.8578 0.15583 0.9630 0.013508 0.008609

Bolded values are the highest LL, least AIC, SIC, HQn and RMSE
Source: Researcher’s Computation, 2019

6
E. E. Omini et al.: Macroeconomic Variables and Volatility of Stock Price Returns in Nigeria

Fitness and Forecasting Accuracy ofEGARCH (1, 1), TARCH (1, 1), GARCH (1, 1) and ARCH (1) based on Stocks from Zenith Bank
Table 3 presents the result of the fitness and forecasting accuracy of EGARCH (1,1), TARCH (1, 1), GARCH (1, 1) and ARCH (1) based on stocks
from Zenith Bank.

Table 3: Fitness and forecasting accuracy and diagnostic checking for the different volatility models for Zenith Bank stock
Volatility models LL AIC SIC HQn E stat P-value RMSE MAE
GARCH(1,1) Normal 10029.64 -6.2106 -6.1880 -6.2025 1.1799 0.2774 0.011844 0.007483
Std 10080.93 -6.2417 -6.2172 -6.2330 1.4485 0.2289 0.011844 0.007480
GED 9785.140 -6.0583 -6.0339 -6.0496 2.1546 0.1422 0.011849 0.007494
TARCH (1,1) Normal 9743.277 -6.0324 -6.0079 -6.236 2.2081 0.1374 0.011845 0.007481
Std 10561.59 -6.5391 -6.51273 -6.5297 1.052 0.3051 0.011823 0.007451
GED 9681.708 -5.9936 -5.96724 -5.98417 1.250 0.2637 0.011847 0.007451
EGARCH(1,1) Normal 10407.59 -6.4443 -6.4198 -6.4355 0.0012 0.9723 0.011845 0.007482
Std 10775.12 -6.6715 -6.6451 -6.6620 0.10781 0.7427 0.011845 0.007446

GED 10788.33 -6.6797 -6.6530 -6.67023 0.19118 0.6620 0.011844 0.007445

ARCH(1,1) Normal 10074.34 -6.2389 -6.21817 -6.23147 0.0961 0.7566 0.011842 0.007477
Std 10262.07 -6.355281 -6.3327 -6.34717 0.20552 0.6503 0.011839 0.007449
GED 10108.75 -6.2596 -6.2370 -6.2515 0.3598 0.5486 0.011840 0.007459
Source: Researcher’s Computation, 2019

7
Journal of Science, Engineering and Technology, Vol. 7 (1), March 2020

Fitness and Forecasting Accuracy of GARCH (1, 1), TARCH (1, 1), EGARCH (1, 1) and ARCH (1) With and Without Inflation Rate,
Price of Crude Oil and Exchange Rate
Table 4 and Table 5 reveal that the volatility models with macroeconomic variables and crude oil price performed better than that without both in
terms of fitness and forecasting accuracy.

Table 4: Comparison of fitness performance of volatility models with inflation rate, price of crude oil and exchange rate and that without these
variables
With price of crude oil and macroeconomics Without price of crude oil and macroeconomics
variables variables
Best model LL AIC SIC HQn LL AIC SIC HQn
Zenith bank E-GARCH- 10788.33 -6.6797 -6.6530 -6.67023 10764.95 -6.6668 -6.6518 -6.6614
GED
First bank E-GARCH- 10233.38 -6.34547 -6.3191 -6.3360 10210.59 -6.32033 -6.3252 -6.3249
GED
Nigeria GARCH- 10715.79 -6.6230 -6.5986 -6.6143 10591.55 -6.4334 -6.4202 -6.4287
Brewery GED
Bolded values are the highest LL, Least AIC, SIC, HQn

Table 5: Comparison of fitness performance of volatility models with inflation rate, exchange rate and crude oil price and that without these
variables
Company With price of crude oil and Without price of crude oil and
macroeconomics variables macroeconomics variables
Best model RMSE MAE RMSE MAE
Zenith bank TARCH-Normal 0.011823 0.007482 0.011846 0.007490
First bank GARCH-Std 0.01368 0.008489 0.013903 0.008591
Nigeria Brewery GARCH-Std 0.01014 0.006754 0.01061 0.006767
Bolded values are the least RMSE.
Source: Researcher’s Computations, 2019

8
E. E. Omini et al.: Macroeconomic Variables and Volatility of Stock Price Returns in Nigeria

DISCUSSION OF RESULTS SUMMARY

Result from Table 1 which shows the Crude oil price as a factor to other
performance evaluation result of the models macroeconomic variables that affect stock
based on fitness and forecasting accuracy on price returns and volatility was introduced. It
Nigeria Brewery Stock shows that, in Terms was discovered also that volatility models
of fitness, EGARCH (1, 1)-Std gave the with macroeconomic variables together with
highest log likelihood (10744.20), least AIC crude oil price perform, better than without
(-6.6305) compared to other competing these variables in terms of fitness and accurate
models. This means that EGARCH (1, 1)- forecasting. This is achieved through the
Std outperformed other models in terms of modification of GARCH (1,1) model.
fitness. For forecasting accuracy, GARCH
(1, 1)-Std gave the least RMSE of 0.01033 RECOMMENDATIONS
compared to other competing models. i. Other volatility model(s) like the
Result of diagnostic checking reveals that PGARCH is hereby recommended for
the ARCH effect initially present in the further research. This model does not
series has been removed (p>0.05). stop at determining the impact of news
on stock returns; it distinguishes
Result of fitness and forecasting accuracy between good news and bad news and
based on First bank stock in table 2 shows the persistence of this news on stock
that EGARCH –GED gave the highest log return volatility.
likelihood (10233.38), least AIC (-6.34547), ii. On the basis of RMSE and theil,
least SIC (-6.3191) and least HQn (-63360) PGARCH (1,1,1) model is
compared with other competing models. In recommended for further forecast as it
terms of forecasting performance, GARCH yields the least forecast error in many
(1, 1) –Std gave the least Root Mean Square cases of forecast.
Error (0.013468) compared to other iii. Mean Absolute Error (MAE) should be
volatility models. Result of diagnostic considered as a basis for comparison as
checking reveals that the ARCH effect it produces the least error compared to
initially present in the series has been RMSE.
removed (p>0.05).
REFERENCES
Result of fitness and forecasting accuracy Arouri, M. E. H., Lahiani, A., Nguyen, D. K.
from table 3 shows that EGARCH (1,1)- (2011). Return and Volatility
GED gave the highest log likelihood Transmission between World Oil
(10788.33), least AIC (-6.6797), SIC (- Prices and Stock Markets of the GCC
6.6530) and HQn (-6.67023) compared to Countries Economic Modelling 28(4),
other volatility models. This means that in 1815-1825.
terms of fitness EGARCH (1,1) –GED
performed better than other models. For Chen, N. F., Roll, R. & Ross, S. A. (1986).
forecasting accuracy, it was TARCH “Economic forces and the stock
compared with other competing models. market” Journal of Business, 59, 383-
This shows the superiority of TARCH (1,1)- 403
Std. over other volatility model considered .
Result of diagnostic checking reveals that Hassan A. M & Dantama Yu (2017).
the ARCH effect initially present in the Determinants of Exchange Rate
series has been removed (p>0.05). Table 4 Volatility: New Estimates from
and Table 5 reveal that the volatility models Nigeria Eastern Journal of Economic
with macroeconomic variables and crude oil and Finance 3: 1-12.
price performed better than that without both
in terms of fitness and forecasting accuracy.

9
Journal of Science, Engineering and Technology, Vol. 7 (1), March 2020

Hameed, A. & Ashraf, H. (2006). Stock

market volatility and weak form
Efficiency: Evidence from Emerging
Market: The Pakistan Development
Review 1029 – 1040.

Islam, M. (2003). The Kuala Lumpur stock

market and economic factors: a
general to specific error correction
modeling test. Journal of the
Academy of Business and Economic
–available at
[Link]
es/mi-MOOGT/is-t-vai-113563578.

Malkiel, B. & Yexiao, Xu (1997). Risk and

Return Revisited: Journal of
Portfolio Management, vol. 23, No.
3, pp. 9 –14.

10
 Heriot-Watt University
Research Gateway

Efficiency of the Nigerian Capital Market: Implications for

Investment Analysis and Performance

Citation for published version:

Samuel, SE & Oka, RU 2010, 'Efficiency of the Nigerian Capital Market: Implications for Investment
Analysis and Performance', Transnational Corporations Review, vol. 2, no. 1, pp. 42-51.
[Link]

Digital Object Identifier (DOI):

10.1080/19186444.2010.11658222

Link:
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Download date: 10. Dec. 2025

 Transnational Corporations Review Vol. 2, No. 1, 2010
[Link] info@[Link] 42-51

Efficiency of the Nigerian Capital Market:

Implications for Investment Analysis and Performance

Sunday Eneojo Samuel and Richard Uzoefuna Oka ∗

Abstract: This paper appraises the nature and efficiency of the Nigerian capital market and its
implications for investment analysis and performance. It examines the implications of the efficient-market
hypothesis and types and levels of market efficiency. Data was collected using a survey questionnaire. A
multi-stage and random sampling technique was used to select a sample including four categories of
people and firms relevant to the study. Data were analyzed using a Likert scale and descriptive statistics.
The null hypothesis was analyzed using a five-point Likert scale with a 5% error term, and the study
found that information has contributed to the efficiency of the Nigerian capital market to a great extent. It
is therefore suggested that the Nigerian Stock Exchange and the Nigeria 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 while also committing to continuous training and
retraining of their staff.

Key words: Nigerian capital market, efficient capital market, market efficiency, securities, investment

1. Introduction
Nigeria is a developing country. Its government has severally shown commitments to its socio-
economic advancement through various initiatives and policy documents. The Millennium
Development Goals (MDGs), Vision 20, 20-20, Poverty Alleviation Programme, financial sector
reforms and the Seven Point Agenda are instances of this. However, the success or failure of any
government-led development effort hinges on the soundness of its financial system. In a nutshell,
the financial market is the heartbeat of any market economy, and the capital market is the focal
point of the financial market.
According to Ologunde et al (2006), the capital market is a collection of financial institutions set up for
the granting of medium- and long-term loans. Babalola (2008) is of the opinion that the major
significance of the financial system in any economy is its ability to mobilize savings and to efficiently
intermediate in financial service delivery so as to create liquidity in the economy, minimize information
cost, and create a bridge in assets diversification. Nwankwo (2007) states that a developed local securities

∗
Sunday Eneojo Samuel and Richard Uzoefuna Oka, Department Of Accounting, Kogi State University, Anyigba, Nigeria. Tel:
+234 8059281392; +234 7063049070 E-mail: aglowsun@[Link], drruoka@[Link].

42
 Efficiency of the Nigerian Capital Market

market will stabilize the financial sector, entrench competitive spirit within the sector, and effectively
complement the banking sector.

The Nigerian capital market is a veritable instrument for promoting limitless wealth
accumulation through investment (Adepetun, 2008). However, in efficient capital markets,
information is expected to be accurate because security prices react instantaneously to new
information such that there are no opportunities for market participants to achieve abnormal
returns consistently (Hadi, 2006).

The broad objective of this study is to appraise the efficiency of the Nigerian capital market, its
implications for investment analysis and performance. Specifically, the study intends to:

(i) create a clear understanding of the nature of the Nigerian capital market;
(ii) determine the efficiency level of the Nigerian capital market;
(iii) make recommendations based on the findings.
The following null hypothesis was formulated and tested:

(i) Information has not greatly contributed to the efficiency of the Nigerian capital market.

2. Efficiency of the Nigerian capital market

2.1. An overview of the Nigerian capital market
According to Okwoli and Kpelai (2008), the capital market is the second type of financial market that
provides the facilities for long-term lending and borrowing using securities. This is the market in which
large amounts of money or capital are raised by institutions such as governments and companies for long-
term use (Drummond, 1998).

Capital market activities took place long before the establishment of actual capital markets. According to
Momoh (2008), capital market activities in Nigeria began in 1946 during the introduction of the Ten Year
Development Ordinance, through which 3.25% ₤300,000 loan stock was issued to the public in units of
₤10, with a maturity date of 10-15 years. Mfomiso (2007) states that prior to 1960, virtually all formal
savings were made through the banking sector, with only core capital investments made on behalf of
Nigeria by Britain on the London Stock Exchange.

The first ever capital market in Nigeria was the Lagos Stock Exchange, which began operation in 1961.
However, the first ever ordinary shares to be traded in Nigeria and offered to the public were those of the
Nigeria Cement Company Limited in 1959, followed by the ordinary and preference shares of John Holt
(Liverpool) Investment Company Limited and the ordinary shares of Nigeria Tobacco Company Limited
in 1960 (Areago, 1990). These activities were supervised by the London Stock Exchange (Okwoli and

43
 Sunday Eneojo Samuel and Richard Uzoefuna Oka

Kpelai, 2008). Subsequently, in 1976, the Lagos Stock Exchange was transformed into “The Nigeria
Stock Exchange” following the recommendation of Dr. Pius Okigbo’s committee (Uduehi, 2005).

The Nigerian capital market is categorized into the primary and secondary markets. The primary is the
market for fresh issues. Traded securities are offered through subscription, right issues, offer for sales, by
introduction, and by private placement (Drummond, 1998). The secondary market operates after an issue
has been completed and securities listed in the stock market (Okwoli and Kpelai, 2008). The secondary
market is made up of two exchanges: The Nigeria Stock Exchange and the Abuja Commodities Exchange
(Sanni, 2008).

2.2. Efficient-market hypothesis

According to Koijen and Nieuwerburgh (2007), the efficient-market hypothesis implies that capital
markets are efficient with regards to a set of information, thereby rationally reflecting all new information
in securities prices in terms of magnitude and direction of such movements. This means that stock prices
move with the influx of information (McMinn, 2009). Hirschey and Nofsinger (2008) state that the
efficient-market hypothesis is the situation where security prices fully reflect all available information.
That is to say, “if stock and bond markets are perfectly efficient and current prices fully reflect all
available information, then neither buyers nor sellers have an information advantage”.

2.3. Efficient capital market

Efficient capital market is the ability of securities to reflect and incorporate relevant information, almost
instantaneously, in their prices (Pandey, 2005). According to Hadi (2006), an efficient capital market is a
market that is efficient in processing information. Bruce (2008) opined that, efficient capital market is
informational efficiency, which essentially means that market prices adjust instantaneously to new
information that could inform future prices.

2.4. Types of market efficiency

There are three types of market efficiency; they are Operational efficiency, Allocation efficiency and
pricing efficiency.

2.4.1. Operational efficiency: According to Mensah (2003), operational efficiency implies that all
transactions in securities are carried out instantly, correctly, and at a low cost. This may be
promoted through enhancing competition between exchanges for secondary market transaction.

2.4.2. Allocation efficiency: This refers to mechanism which allocates scarce resources to where they
can be most productive.

2.4.3. Pricing efficiency: A market that is price efficient is one in which an investor can only expect to
earn a risk-adjusted returns from an investment as prices move instantaneous and in an unbiased

44
 Efficiency of the Nigerian Capital Market

manner to any news. A capital market is described as efficient if security prices are timely and
accurately reflects all available information about the current and future likely worth of the assets
(Adelegan, 2008).

2.5. Levels of market efficiency

Robert (1991) identifies the followings as the three levels of market efficiency: weak form, semi-strong
form and strong form.

2.5.1. Weak form efficiency: Okwoli and Kpelai (2008) defined weak form efficiency as a situation
where the security prices reflect all the past information as reported by the press. It is therefore,
not possible for an investor to predict future security price by analyzing historical prices, and
achieve a performance (return) better than the stock market index. It is so because the capital
market has no memory, and the stock market index has already incorporated past information
about the security prices in the market price (Pandey, 2005).
2.5.2. Semi-strong efficiency: This level of efficiency assumes that all publicly available information
about a given security has been accurately factored into the present price of that security (Russel
and Violet, 2002). Okwoli and Kpelai (2008) looked at semi-strong efficiency as a situation
where the security prices reflect not only past information but all other published information.
2.5.3. Strong-form efficiency: This is a situation where the security prices reflect not only public
information but all information that can be acquired by painstaking analysis of the company and
the security (Okwoli and Kpelai, 2008). According to Pandey (2005), in strong-form efficiency,
the security prices reflect all published and unpublished, public and private information.
2.6. Implications of the efficient-market hypothesis

The concept of market efficiency has a number of implications for three categories of persons. These are
the investing community, the corporate world and the regulatory authorities (Mensah, 2003).

2.6.1. For investors:

• Both technical and fundamental analyses are meaningless.

• Rationality demands that an investor hold a well-diversified portfolio.
• It is necessary for high investor networks to demand for timely release of adequate
information in order to steer the market towards semi-strong form efficiency.
2.6.2. For companies:

• Emphasize substance over form

• It is pointless to fine tune the timing of new issues
• Consider prices of own stocks as an indication of market perception of virility or a lack
of it.

45
 Sunday Eneojo Samuel and Richard Uzoefuna Oka

2.6.3. For regulators

Professional accounting bodies and capital market regulations should be geared towards boosting
investors’ confidence through the prevention of insider trading; protection of investors from abuse;
minimizing systematic risk; enthronement of fairness; and enhancing market efficiency.

2.7. Methodology
A survey research method was used for the study. The instrument for data collection was the
questionnaire. Fixed response questions were put forward to the respondents as data collected from such
facilitates data analysis and estimation of the validity and reliability indices of the instrument.

A multi-stage sampling technique was used to select four categories of people and firms relevant to the
study. They are professional accountants, stock broking firms, the Nigeria Stock Exchange and
Academicians. A random sampling technique was later used to select ten staff from stock broking firm,
twenty from Nigerian Stock Exchange, fifteen from Professional Accountants and thirty from the
academia making a total sample size of seventy-five.

The analytical tools used in analyzing the data collected for the study include the descriptive statistics and
Likert Scale. The descriptive statistical tools used were frequency distribution percentages and tables. The
null hypothesis was analyzed on a five-point Likert scale measuring the extent information has
contributed to the efficiency of the Nigeria capital market.

The formula for Likert Scale is (∑FX)/N

Where ∑FX = weighted sum of frequencies and N = Total response.

The mean point of scale is (∑X)/n

Where ∑X = sum of nominal value and n= Number of response categories

The cut-off point = mean + e, Where e = error term i.e. 0.05.

2.8. Data analysis and results

Data collected via the questionnaire are analyzed bellow:

Table 1.1 below shows the frequency distribution of respondents’ view on the efficiency of the
Nigerian capital market.

Table 1.1. Efficiency of the Nigerian capital market

Responses Frequency Percentage

Yes 40 53

46
 Efficiency of the Nigerian Capital Market

No 35 47
Total 75 100

Source: Field survey, 2009.

From Table 1.1 above, 53% of the respondents said the Nigerian capital market is efficient while 47%
said it is not.

Table 1.2. below shows the frequency distribution of respondents’ view on the level of efficiency of the
Nigerian capital market.

Table 1.2. Level of efficiency of Nigerian capital market.

Level Frequency Percentage

Weak form 51 68
Semi strong form 15 20
Strong form 9 12
Total 75 100

Source: Field survey, 2009

From Table 1.2. above, 68% of the respondents are of the opinion that the level of efficient of the Nigeria
capital market is weak form, while 20% and 12% of the respondents said it is semi-strong form and strong
form respectively.

2.9. Test of hypothesis

H0: Information has not contributed to the efficiency of the Nigerian Capital Market to a great extent.

Table 1.3. below shows the calculation of figures to determine the extent information has contributed to
the efficiency of the Nigerian Capital Market using Likert-Scale.

Table 1.3. Calculation of figures using Likert Scale

Responses Frequency (F) Scale (X) FX

To a very great extent 29 5 145
To a great extent 35 4 140
Undecided 4 3 12
To no extent 7 2 14
To no extent at all 0 1 0
Total 75 15 311

Source: Field survey, 2009

47
 Sunday Eneojo Samuel and Richard Uzoefuna Oka

Mean point = (∑FX)/N = 311/45 = 4.15

Mean point of scale = (∑X)/N = 15/5 = 3.00

Cut off point = Mean + e = 3.00 + 0.05 = 3.05

To determine the extent to which information has contributed to the efficiency of the Nigerian capital
market, a five-point Likert scale of rating responses was used. The mean point of the responses is 4.15
and the cut off point is 3.05. The decision rule is that where the calculated mean point is above the cut off
point, it is regarded as effective; while below, reverse is the case. The calculated mean point of 4.15 is
greater than the cut off point of 3.05. Therefore, the null hypothesis is hereby rejected. That is,
information has contributed to the efficiency of the Nigerian capital market to a great extent.

3. Conclusion
The following conclusions were reached from the findings of the study:

(i) The results of the study are consistent with the reports of Adelegan (2008) which disclosed that the
Nigerian capital market is in the weak form level of efficiency. This is premised on the following:

z Operations of the market are not transparent. 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).
z There are instances of stock overvaluation and ‘cooked’ accounting books as in the case of
Cadbury Nigeria Plc (Oluba, 2008; Ryan, 2006)
(ii) 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.

(iii) An efficient market holds profound implications for investors, companies and regulators.

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.

48
 Efficiency of the Nigerian Capital Market

References

Adelegan, Olatundun J. 2003. Capital market efficiency and the effects of dividend announcements on share prices
in Nigeria. African Development Review, 15 (2-3): 218-36.

Adepetun, Adeyemi. 2008. Investment opportunities in capital market. The Guardian, July 23, 2008.

Anonymous. 2008. Capital market: Shortcoming investors. Nigerian Tribune, May 20, 2008.

Areago, R. B. 1990. Nigerian Stock Exchange: Genesis, organization, and operations. London, United Kingdom:
Global Investor Bookshop.

Babalola, Remi. A speech delivered at members’ evening roundtable talks held at IOD National Secretariat, Ikoyi,
Lagos, Nigeria.

Bruce Chadwick’s Blog. Types of Market Efficiency. 4 January 2008. Available from
[Link]

Drummond, G. 1998. Introduction to international capital market. Security Institute Publication: 7.

Hadi, Mahdi M. 2006. Review of capital market efficiency: Some evidence from Jordanian market. International
Research Journal of Finance and Economics 3.

Hirschey, Mark, and John R. Nofsinger. 2008. Investments: Analysis and Behavior. New York, USA: McGraw-Hill
Irwin.

Investing in Africa (weblog). Nigeria: Cadbury Nigeria’s cooked books. 20 December 2006. Available from
[Link]

Koijen, Ralph S. J., and Stijn Van Nieuwerburgh. 2007. Market efficiency and return predictability. New York,
USA: New York Univeristy Stern School of Business and NBER. Available from
[Link]

McMinn, David. Inefficient vs. efficient market hypothesis. Moon Sun Finance. 2009. Available from
[Link]

Mensah, Sam. 2003. The essentials of an efficient market and implications for investors, firms, and regulators. Paper
presented at UNECA Workshop on African Capital Markets Development, 27-29 October, in Johannesburg,
South Africa.

Mfomiso, G. A. 2007. History of Nigeria Stock Exchange. Stock Market Investment (blog archive). Available from
[Link]

Momoh. 2008. The Nigerian capital market. The Tide Online, 8 February, 2008.

Nwankwo, Abraham. 2007. Towards creating a vibrant bond market in Nigeria. Paper presented at First Annual
BusinessWorld Investment Lecture, 6 November, in Lagos, Nigeria.

Okwoli, Ambrose A., and S. T. Kpebi. 2008. Introduction to Managerial Finance. 2nd ed. Jos, Nigeria: Go-Go
International Limited.

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Ologunde, Adedoyin O., David O. Elumilade, and T. O. Asaolu. 2006. Stock market capitalization and interest rate
in Nigeria: A time series analysis. International Research Journal of Finance and Economics 4.

Oluba, Martin. 2008. The visible hand of the Nigerian Stock Exchange. The Business Day. 20 April.

Pandey, I. M. 2005. Financial Management, Ninth Edition. New Delhi:Vikas.

Roberts, Harry V. 1967. Statistical versus clinical prediction of stock market [unpublished]. Quoted in Brealey,
Richard A., and Myers, Stewart C. 2006. Principles of Corporate Finance. New York, USA: McGraw-Hill: 295.

Russel, Philip S., and Violet M. Torbey. The efficient market hypothesis on trial: A survey. Carrollton, Georgia,
USA: University of West Georgia. Available from [Link]

Sanni, Y. 2008. The Nigerian capital market: Lessons and opportunities. Available from
[Link]

Acknowledgement

A number of individuals have contributed immensely in bringing this article to its present state. We are
thankful to all of them for their criticisms, help and encouragement. Even though time and space
constraints would not permit us to list all of their names, we must specifically express our gratitude to
Professor Akpa Abimaje of Benue State University, Makurdi, Nigeria, and Dr. Ajachukwu, Mr. Rufai, Mr.
Inyanda, and Mr. Audu, all of Kogi State University, Anyigba, Nigeria.

About the Authors

Sunday Eneojo Samuel is a lecturer in the Department of Accounting at Kogi State

University in Anyigba, Nigeria, where he obtained his [Link]. in the discipline. He
received his [Link] in Accounting and Finance from Benue State University in Makurdi,
Nigeria and is a member of the Institute of Certified Public Accountants of Nigeria
(ICPAN). Mr. Samuel worked for Arewa Textile plc as finishing inspector from 1999-
2002 and also served as a Director of Special Duties for the World Changers Youth
Foundation in Kaduna, Nigeria (a Non Governmental Organization) from 2007 to 2008.

Richard Uzoefuna Oka, Ph.D., is a Senior Lecturer in the Department of Accounting at Kogi State
University in Anyigba, Nigeria. He was formerly the Head of the Department of Accounting and Dean of
the Faculty of Management Sciences at the same university. Dr. Oka’s educational history is as follows:
Associate Diploma in Education, University of Lagos, 1974; [Link]. (Hons) in Accountancy, University of

50
 Efficiency of the Nigerian Capital Market

Nigeria, Enugu Campus, 1980; Post-Graduate Diploma, Business and Public Administration, Anambra
State University of Technology, Enugu, 1989; MBA in Banking and Finance, Anambra State University of
Technology, 1991; Professional Diploma in Computer Software Applications, Enugu State University of
Science and Technology, Enugu, 1992; Ph.D. in Agricultural Economics (Agricultural Financing), Enugu
State University Of Science and Technology, Enugu, 2003. He became a Certified National Accountant
(CNA) of the Association of National Accountants of Nigeria (ANAN) in 1994, a Fellow of The Institute of
Corporate Administration of Nigeria (FCAI) in 2008, and a Fellow of the Strategy Institute of Natural
Resources and Human Development (FRHD) in 2008.

Contact Information

Sunday Eneojo Samuel and Richard Uzoefuna Oka, Department Of Accounting, Kogi State University,
Anyigba, Nigeria. Tel: +234 8059281392; +234 7063049070 E-mail: aglowsun@[Link],
drruoka@[Link].

51
International Journal of Economics and Financial Issues
Vol. 2, No. 3, 2012, pp.340-347
ISSN: 2146-4138
[Link]

Weak Form Efficiency of the Nigerian Stock Market:

An Empirical Analysis (1984 – 2009)

Pyemo Afego
LQ 54 Malamre Quarters Jimeta Yola Adamawa State – Nigeria.
Tel: +234 807 727 5888. E-mail: [Link]@[Link]

ABSTRACT: This paper examines the weak-form efficient markets hypothesis for the Nigerian stock
market by testing for random walks in the monthly index returns over the period 1984-2009. The
results of the non-parametric runs test show that index returns on the Nigerian Stock Exchange (NSE)
display a predictable component, thus suggesting that traders can earn superior returns by employing
trading rules. The statistically significant deviations from randomness are also suggestive of sub-
optimal allocation of investment capital within the economy. The findings, in general, contradict the
weak-form of the efficient markets hypothesis. Finally, a range of policy strategies for improving the
allocative capacity and quality of the information environment of the NSE are discussed.

Keywords: Random walk hypothesis; Market efficiency; Runs test; Stock returns; Nigeria
JEL Classification: G10; G14

1. Introduction
A major focus of empirical finance literature has centered on the performance of financial markets
and their ability to efficiently allocate investment capital within an economy. For many growth
strategists, access to investment capital, mainly through well functioning financial markets, is crucial
for economic development (Obstfeld, 1994). Consequently, recent years have seen an increasing
prominence of stock markets in the developing regions of the World, including Africa. The expansion
in stock market activity across the African continent is widely seen as a positive development in view
of the potentially significant role financial markets play in the economic growth process.
However, the ability of a stock market to contribute to the financial development and growth of an
economy depends on its informational, operational and allocational efficiency (Lagoarde-Segot and
Lucey, 2008). According to the random walk version of the efficient markets hypothesis (EMH), a
market is ‘efficient’ if stock prices reflect all currently available information such that future prices
cannot be predicted on the basis of this information (Fama, 1965). Hence, tests of the randomness of
stock prices are commonly used to determine whether a market is (weak-form) efficient or not. If
stock prices exhibit random walk, then the market is ‘efficient’ in the sense that investors cannot use
today’s stock price information to predict tomorrow’s price. On the other hand, presence of serial
correlations or predictable components in stock prices suggest that past trends in price movements can
be used to predict future prices.
Early research into the random walk and efficient markets hypothesis (EMH) has shown that
developed markets, particularly the US and UK, are ‘efficient’ in the sense that security prices are
random and reflect all historical information (e.g. Kendall, 1953; Fama, 1965). More recent studies
(e.g. Ojah and Karemera, 1999; Fifield et al., 2002; and Worthington and Higgs, 2004) have focused
on mature emerging markets domiciled in Europe, Latin America and Asia, and the evidence indicates
that these markets are weak-form efficient.
The literature relating to emerging markets in the Africa region is notably scant despite the
remarkably superior returns and significant diversification benefits that many of the region’s equity
markets offer. For example in 2004, returns on African stock markets (ASMs) outperformed both the
Morgan Stanley Capital International (MSCI) global index and S&P 500 index by 14 percent and 18
percent respectively1. Similarly, recent research (e.g. Senbet and Otchere, 2010) shows that the recent
1
See Databank, (2004), Africa stock markets: 2003 Review & Outlook. Group Research
Weak Form Efficiency of the Nigerian Stock Market: An Empirical Analysis (1984 – 2009) 341

global financial crisis which wiped equity markets across the globe only marginally affected African
equity markets (excluding South Africa, Egypt and Nigeria).
Against this backdrop, the nature of the price discovery process in Africa’s capital markets is of
significant interest to investors, policy makers, regulators and researchers alike. For investors, the
presence of exploitable patterns in these markets presents opportunities for profit-making. Similarly,
inefficiencies in the price formation process of financial assets are a matter of concern to regulators
and policy makers because it implies less-than-optimal allocation of investment capital in the
economy. Researchers on the other hand are interested in determining the extent to which the theory of
efficient markets is upheld or contradicted by empirical findings from these markets. As earlier
mentioned, the literature on market efficiency in Africa’s emerging markets is scant and the existing
evidence controversial. As a result very little is known about the price discovery process in these
markets. The aim of this paper therefore is to expand the scope of the empirical literature of the EMH
by employing a range of tests to investigate the weak-form efficiency for the Nigerian stock market.
Most of the previous studies on weak-form efficiency of the Nigerian stock market (e.g. Samuels
and Yacout, 1981; Ayadi, 1984; and Olowe, 1999) relied on samples from individual stock prices and
the studies were conducted in the period preceding the introduction of major reforms to the Nigeria
Stock Exchange (NSE). This study marks a departure from previous studies and contributes to the
literature in a number of important ways: First, by using the NSE All share (monthly) index prices, we
are able to analyze a broad-based return series representative of the whole market. Second, by
investigating the statistical properties of the NSE All share index, we are able to establish the extent to
which the market as a whole exhibits the stylized facts for financial time series. From a policy
perspective, this paper marks an important contribution by discussing useful strategies for improving
the efficiency of the NSE. On the whole, this paper expands the scope of the empirical literature of the
EMH for the Nigerian stock market in particular and African markets in general and, by so doing,
contribute to our understanding of current research into Africa’s equity markets.
Our results show evidence of significant deviations from randomness for the NSE All share price
index. This implies that index price changes are non-random and predictable, suggesting that traders
can earn superior returns over the buy-and- hold strategy by using trading rules. This observation
contradicts the random walk hypothesis and the weak form EMH that security prices are unpredictable
and reflect all historical information.
The rest of the paper is organized as follows: The next section reviews major theoretical debates
and empirical findings of studies of the weak form EMH previously undertaken in Nigeria. Section 3
describes the data set and discusses some of the useful tests of the random walk hypothesis employed
in this study. Results and findings are reported in section 4 while section 5 concludes.

2. Theoretical Framework and Review of Relevant Literature

2.1 The Efficient Markets Hypothesis (EMH)
According to Jensen (1978), a market is ‘efficient’ with respect to information set Өt if it is not
possible to generate excess returns on the basis of the information set Өt. This implies that excess
returns cannot be generated by trading on the basis of the available information set because prices
adjust instantaneously and in an unbiased manner to new information, leaving no room for investors to
make excess returns. This further means that all information available about a stock’s expected future
cash flows is incorporated into the price of the stock.
The three variants to the EMH are: (i) the weak form efficiency in which all historical price
information constitute the information set which is reflected in stock prices; (ii) the semi strong form
efficiency in which all publicly available information (e.g. dividend, earnings and merger
announcements) constitutes the information set which is reflected in stock prices, and; (iii) the strong
form efficiency where all available information, including private or insider information, make up the
information set which is reflected in stock prices.
2.2 The Random Walk Model
The random walk model maintains that the price change at time t should be independent of the
sequence of price changes in previous time periods. And this is in consonance with the postulations of
the weak-form version of the EMH that technical analysis, based on historical price information, is
worthless since current prices always adjust to all historical information. Like the EMH, the Random
Walk Model also is in three variants.
International Journal of Economics and Financial Issues, Vol. 2, No. 3, 2012, pp.340-347 342

Random walk 1 (RW1) implies that successive price increments are independently and
identically distributed (IID), and represents the strictest version of the random walk model. Thus the
stock price at time t is computed as:
Pt = µ+ Pt-1 + ℮t ℮t ~ IID (0, σ2) (1)
where Pt represents stock price at time t; µ, the expected price change or drift, and; IID (0, σ2), denotes
that the successive price changes, ℮t s, are independently and identically distributed with a zero mean
and a constant variance.
Considering that financial time series, over long periods, display time-varying volatility and
deviations from normality (Lo, 1997), the random walk 2 model (RW2) allows for unconditional
heteroskedasticity in the successive price changes, such that:
Pt = µ+ Pt-1 + ℮t ℮t ~ INID (0, σ2) (2)
where INID denotes that the successive price changes are independently but not identically distributed
with a zero mean and a constant variance. Nevertheless, the major definitional property implied by the
RW1 remains unchanged; that is “any arbitrary transformation of future price increments [cannot be
forecast] using arbitrary transformation of past price increments” (Campbell et al., 1997:33).
On the other hand, the weakest version of the random walk model, random walk 3 (RW3),
relaxes the assumption of independence to accommodate dependent but uncorrelated increments. A
case in which RW3 will hold but not RW1 and RW2 is any process where Cov (℮t, ℮t+k) = 0 for all k,
but where Cov (℮t, ℮t+k) ≠ 0 for some k, in both cases k ≠ 0. While the increments are uncorrelated,
they are not independent owing to the fact that the squared increments are correlated (Campbell et al,
1997). The current study focuses on RW3.
2.3 Review of Relevant Literature
Previous investigations on the weak-form efficiency of the Nigerian stock market have
employed different methodologies and data of varying duration and frequency. Also, the existing
literature consists of individual studies on the Nigerian stock market and multi-country studies in
which the NSE is covered.
A number of these studies report evidence of randomness in equity prices. For example,
Samuels and Yacout (1981) apply autocorrelation tests on weekly price series of 21 stocks listed on
the NSE over the period 1978 to 1979. They fail to find evidence of dependence and conclude the
Nigerian stock market is weak-form efficient. Ayadi (1984) uses a number of non-parametric tests,
including the runs test, in his investigation. Employing weekly prices of 30 stocks between 1977 and
1980, Ayadi reports evidence that prices on the Nigerian stock market follow a random walk.
Similarly, Olowe (1999) tests for serial correlations using monthly data for a sample of 59 stocks
listed on the NSE. He concludes the Nigerian stock market is weak-form efficient. In a separate study,
Jefferis and Smith (2005) test for efficiency across time in 11 African markets (Nigeria inclusive).
Employing time-varying GARCH models on equity price data spanning the period 1990 to 2001,
Jefferis and Smith report that Egypt, Morocco and Nigeria only became weak-form efficient towards
the end of the study period i.e. 2001. Okpara (2010), in a recent study, applied the runs test and
autocorrelation on NSE index prices and concludes the Nigerian stock market follows a random walk,
and therefore is weak-form efficient.
In contrast, evidence against stock price randomness on the NSE has also been reported in
previous studies. For example, Magnusson and Wydick (2002) use partial autocorrelation test for a
number of African markets including Nigeria. They find evidence of significant correlations in stock
returns for Nigeria, Ghana and Zimbabwe, thus suggesting that these markets are not weak-form
efficient. In another multi-country, Smith (2008), using variance ratio tests, concludes none of the 11
markets in his study, which includes Nigeria, is weak-form efficient.
What emerges from a review of previous studies on the weak-form EMH for Nigeria (and
Africa in general) is the mixed and often conflicting findings of the study. This current study attempts
to shed more light on the efficiency debate by investigating additional evidence on the predictability of
stock returns and its implications on the efficiency of the price formation process with respect to the
Nigerian stock market.
2.4 Stock Market Development in Nigeria
The Nigerian capital market was established in 1960 as the Lagos stock exchange. The
exchange was renamed Nigeria Stock Exchange (NSE) in December 1977. Trading commenced at the
exchange in 1961 with about nineteen (19) securities. By the end of 1971, there were 34 securities
Weak Form Efficiency of the Nigerian Stock Market: An Empirical Analysis (1984 – 2009) 343

quoted on the NSE. Since then, there have been significant changes to the NSE in terms of structure
and operations. These changes have resulted in a significant growth in the number of listed firms and
trading activity. The major stock market index – the Nigerian All Share Index - was introduced in
1984 and its composition is restricted to ordinary shares only. In February 2009 the NSE introduced
five (5) additional indices. These are: NSE 30 index, NSE Banking 10 index, NSE Insurance 10 index,
NSE Food/Beverage 10 index and NSE Oil/Gas 5 index.
As at April 2009, there were 13 branches of the NSE and trading takes place 5 days a week,
Monday through Friday. The trading settlement cycle is currently T+3, which is the international
standard. Additionally, the Exchange boasts of a central depository - the Central Securities and
Clearing Systems (CSCS) - which electronically handles clearing, settlement and delivery of
transactions on the Exchange. Currently, no restrictions exist for participation or ownership by foreign
investors. In 2009, the NSE received a big boost towards its drive at internationalization when
Bloomberg announced that real-time stock market data from Nigeria can be accessed from its database
by the global investment community. As at 2010, market capitalization to GDP ratio stood at 26.27%
while the total number of listed securities stood at 215. The Nigerian stock market is currently the
most liquid stock market in West Africa and the third largest stock market in Africa, after South Africa
and Egypt (Allen et al., 2011).

3. Data and Methodology

3.1 Description of Data and Hypothesis
This study used the monthly all share index data for the Nigerian stock exchange (NSE). The
All share index includes all listings on the exchange. Given that using daily or weekly prices in a
return series comprising of infrequently traded stocks may lead to significant biases in the results (Lo
and MacKinlay, 1988), we use monthly price series because of the potential for thin trading in
Nigerian equities (Olowe, 1999). Additionally, we use index prices, rather than individual stock prices,
to provide market-wide evidence. The index used is in local currency and the data consists of 305
observations spanning the period February 1984 to June 2009.
The monthly index returns derived from the index levels were transformed into continuously
computed returns as:
Rmt = Ln (Pt – Pt-1) (3)
where Rmt represents monthly market return for period t, Pt and Pt-1 denote market prices for period t
and period t-1 respectively and Ln denotes natural logarithm.
Tests of statistically significant dependence or correlation in stock price changes, as defined
by the random walk model, are traditionally used to test for weak-form efficiency in a market
(Mabhunu, 2004). Therefore, to investigate the weak-form efficiency of the NSE, we test, in the main,
the following hypotheses:
Ho: prices on the Nigerian stock exchange follow a random walk
H1: prices on the Nigerian stock exchange do not follow a random walk
3.2 Methodology
3.2.1 Kolmogrov-Smirnov (K-S) goodness of fit test
The normality of return distribution is one of the basic assumptions of the weak-form EMH
(Simons and Laryea, 2005). Therefore, we use the K-S goodness of fit test to test the null hypothesis
that the observed cumulative distribution function (CDF) of the returns is identical to a normal
distribution. If the Z-statistic is greater or equal to the p value, we accept the null hypothesis of
normality in the return distribution.
3.2.2 Runs test
To test for randomness or serial independence in stock price changes, we use the runs test.
Being a non-parametric test, the runs test is robust to non-normal return distributions. A run occurs
when there is no difference between the sign of two changes (Okpara, 2010). The objective is to
compare the actual number of runs with the expected number of runs. If the actual number of runs is
significantly different from the expected number of runs, the null hypothesis of randomness in
successive price changes is rejected
We estimate the expected number of runs as:
m = 2n1 n2 + 1 (4)
n
International Journal of Economics and Financial Issues, Vol. 2, No. 3, 2012, pp.340-347 344

where m represents the expected number of runs, n1, n2, denote the number of positive observations
and number of negative observations respectively, and n represents the total number of observations.
The variance of m is given by:
σ2m = 2n1 n2 (2n1 n2 - n) (5)
(n)2 (n -1)

For a larger sample size (N > 30), the distribution of m is approximately normal and the standard
normal Z-statistic is estimated as:

Z=r–m (6)
σ2m
where r represents the actual number of runs.
To accept the null hypothesis of randomness, the Z statistic must fall within the critical value ±1.96, at
the 5% significance level, or ±2.576 at 1% significance level.

4. Results
4.1 Normality Tests
A normal distribution is symmetric around the mean, while a skewed distribution is not
(Brooks, 2008). Also, a normal distribution is defined to have a coefficient of kurtosis of 3. Large
kurtosis (>3) is indicative of a leptokurtic (peaked) distribution while small kurtosis (<3) is indicative
of a platykurtic (flat) distribution.
The statistical properties of the data presented in Table 1 show that the mean return is 0.01812
while the standard deviation is 0.06583. We also see that the distribution is negatively skewed and
non-symmetric with a (negative) coefficient of skewness of -0.42, indicating that there are more
negative extreme values than positive extreme values in the sample period. The quartile - quartile (Q –
Q) plot of the stock price return, as shown in figure 1, confirms that the return distribution is non-
normal and negatively skewed, with a long left tail. We see also that the distribution of the returns has
a kurtosis coefficient of 10.25 which is larger than 3. The leptokurtic nature of the price series is
indicative of a peaked distribution. According to Brooks (2008), a leptokurtic distribution is more
likely to characterize financial time series.

Table 1. Statistical properties of stock returns

N Mean St. Dev Minimum Maximum Skewness Kurtosis

304 0.01812 0.06583 -0.037331 0.35627 -0.42 10.25

The results of the Kolmogrov-Smirnov goodness of fit test are presented in Table 2. The null
hypothesis that the return series come from a normal distribution is rejected since the probability of the
computed Z-statistic is less than the p value, 0.05.

Table 2. Results of One-Sample Kolmogrov-Smirnov Goodness of Fit Test

No. of Mean Std. Dev. Most Positive Negative Kolmogrov- Asymp.
observations extreme Smirnov Z Sig. (2-
absolute tailed)
diff.
304 0.0182042 0.0659170 0.122 0.111 -0.122 2.127 0.000
Weak Form Efficiency of the Nigerian Stock Market: An Empirical Analysis (1984 – 2009) 345

Figure 1. Q-Q plot of stock returns

Expected Normal Value

0.3

0.2

0.1

0.0

-0.1

-0.2
-0.4 -0.2 0.0 0.2 0.4
Observed Value

In sum, the preliminary statistical results clearly indicate that the assumption of normality
cannot be maintained for the monthly index returns. The index returns are negatively skewed and the
evidence of peakedness is inconsistent with a normal distribution. To this end, we employ the non-
parametric runs test which is robust to deviations from normality in a return distribution.
4.2 Runs Tests
The results of the runs test reported in Table 3 indicate that the null hypothesis of
independence and randomness in stock price changes is rejected since the calculated Z-statistic of -
5.047 lies outside the critical values of ±1.96 and ±2.576 at the 5% and 1% significance levels
respectively. A significant negative Z value means the actual number of runs is lower than the
expected number. A negative Z value also indicates the presence of positive serial correlations with
respect to the return series. As mentioned in the methodology section, a significant Z-statistic is
indicative of non-randomness and serial dependence in a return series. Therefore the random walk and
weak-form efficiency hypothesis is rejected for the Nigerian stock market.

Table 3. Results of runs test

Total Mean Cases<mean Cases>mean Actual Expected Z-statistic Asymp.
cases runs runs Sig. (2-
tailed)
304 0.0182 156 148 109 153.37 -5.047 0.000

Although the results from this study contradict few previous studies on the NSE which have
employed the runs test (e.g. Olowe, 1999 and Okpara, 2010), they are consistent with most others (e.g.
Appiah-Kusi and Menyah, 2003; Simons and Laryea, 2005; Smith, 2008; Emenike, 2008 and Mollah
and Vitali, 2011). Given that African stock markets, including the NSE, are bedeviled by problems of
illiquidity, thin trading, lack of market transparency and poor regulatory standards (Mlambo and
Biekpe, 2005), the results reported in this study are not inconsistent with expectations.
4.3 Implications of findings
The pattern of dependence in stock price changes suggests that past data on prices may be
used to predict future prices, and this violates the weak-form of the EMH. The discovery of significant
positive correlations in stock price changes also suggests that stock prices only partially reflect the fair
value of stocks, leading to mispricing of risk and misallocation of investment capital. This further
implies that investment resources are not channeled to their most productive uses, thereby hampering
growth and development of the domestic economy.
International Journal of Economics and Financial Issues, Vol. 2, No. 3, 2012, pp.340-347 346

Additionally, evidence of non-randomness of index returns on the NSE could be a reflection

of “no change” in prices, or “zero returns”, which in turn is a result of the prevalence of infrequently
traded stocks on the NSE All share index. The results reported in this study could also be attributed to
the peculiar nature of the information environment characterized by poor dissemination of information
relating to price movements on the exchange. According to Hirota and Sunder (2002), scant
information relating to securities in markets may lead to speculative and or herding mentality amongst
investors, ultimately resulting in large and correlated price movements.
To this end, policy makers and the regulatory authorities need to intensify efforts to
vigorously pursue extensive reforms to improve the quality of the information environment. One
useful strategy to achieve this would be to encourage more institutional investors to participate on the
NSE. The argument is that the superior capacity of institutional investors to conduct extensive security
analyses would help improve the informational efficiency of the price formation process in the market.
Indeed, Mishra (2011) explains that (in the long run) as the number of sophisticated traders increase,
the market becomes more informationally ‘complete’, thereby becoming more efficient. Furthermore,
the regulatory authorities need to ensure that the effectiveness of support institutions are in line with
international best practices since it is easier to attract investors into markets that have strong,
transparent and effective institutions.

5. Conclusion
This paper examined the weak form efficiency of the Nigerian stock exchange (NSE) using
the non-parametric runs test over the period 1984 to 2009. Specifically, the paper tested the random
walk hypothesis for the Nigerian All share monthly index returns. Significant deviations from
independence were observed in the return series. On the whole, the results from this study suggest that
stock price changes on the NSE are not random and that exploitable patterns exist, making it possible
for arbitrage portfolios to be constructed based on trading rules. This observation contradicts the weak
form of the EMH.
The results, going forward, are subject to several caveats. First, the use of the market index
returns instead of individual stock returns exposes our analyses to the potential biases associated with
infrequently traded stocks. However, the monthly price data used here would have minimized this
potential bias. Secondly, the use of the runs test assumes the return generating process of securities on
the NSE is linear. Therefore a re-examination of the weak form EMH using robust non-linear models
is required. Third, the mere presence of significant serial correlations in price changes may not
necessarily violate the ‘no arbitrage condition’ of the EMH if the use of trading rules does not yield
superior returns over the buy-and-hold strategy after accounting for transaction costs (Alagidede,
2008). Therefore, establishing the profitability of trading rules on the NSE, after accounting for
trading costs, opens up a potentially interesting area for future research. Finally, as this study is limited
in scope to a single emerging African stock market, future work might be required to ascertain the
extent to which the findings from this study are generalisable to other emerging stock markets
domiciled in the Africa region.

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European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016
ISSN 2056-6018

THE WEAK FORM EFFICIENT MARKET HYPOTHESIS IN THE NIGERIAN

STOCK MARKET: AN EMPIRICAL INVESTIGATION

Ikeora, Joseph Jackson Emeka (PhD)

Department of Banking and Finance
Chukwuemaka Odumegwu Ojukwu University, Igbariam Campus, Anambra State

Charles-Anyaogu Nneka B (PhD)

Department of Banking and Finance, Imo StatePolytechnic, Umuagwo, Imo State
&
Andabai, Priye Werigbelegha
Department of Finance and Accountancy, Niger Delta University, Bayelsa State
NIGERIA

ABSTRACT

The study empirically examined the presence of weak form efficiency in the Nigerian stock
market using time series data, 1985-2014. The data used to conduct this research is the All
Share Index (ASI) converted to stock market returns. Time series econometrics techniques
were conducted for the analysis. The study reveals that the large differences between the
Mean and Standard deviation of the variables in the descriptive statistics suggest that the
stock market is highly risky. The study shows that in the recent period, 2011 to 2014, it is
found that stock returns are normally distributed. The results of the test of serial
independence or randomness as obtained from Runs ADF tests show that in periods 1985 to
1992, 1993 to 1999, 2000 to 2010 and the whole period 1985 to 2014, the Nigerian stock
market is dependent and not random thus inefficient, which indicate that investor can predict
the markets returns. However, stock returns for period 2011 to 2014, market follow random
walk, so investor cannot predict the market returns in the period. Finally, the result shows that
previous stock market return has 15% positive relationship, and 0.23 0.23% predictive
powers. Thus the study concluded that the NSE was not efficient in the weak form between
1985 and 2010, however, it has become efficient from 2011 up to 2014.

Keywords: Presence, Weak, Form, Efficiency, Nigerian, Stock and Market.

INTRODUCTION

Stock market is an organized market for buying and selling financial instruments known as
securities which includes stocks, bonds, options and futures. Most stock markets have a
specific location where the trades are completed known as stock exchanges. For a company
to be traded at these exchanges, it must be listed, and for it to be listed, it must satisfy certain
requirements. Stock market plays a crucial role in cementing the relationship between
investors and the corporate sector. In this process, they help in mobilizing the savings of
people and direct them to the growth of trade, commerce and industrial sectors of an
economy.

The efficiency of the emerging markets assume a greater importance as the trend of
investment is accelerating in these markets as a result of regulatory reforms and removal of
other barriers for the internationally equity investments. The term market efficiency is used to
explain the relationship between information and share in the capital market literature. . One
way to measure the efficiency of the market is to ask what types of information, encompassed
by the total set of all available information, are reflected in securities prices.

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When we talk about market efficiency, we are interested not in the form of structural
relationship between risk and expected return but rather in the precision with which the
market securities relate to its structure. If new information becomes known about a particular
company, how quickly do the prices of securities adjust to reflect the new information? If
prices respond to all relevant new information in a rapid fashion, we can say the market is
relatively efficient. If, instead, the information disseminates rather slowly throughout the
market, and if investors take time in analyzing the information and reacting, and possibly
overreacting to it, values may deviate from values based on a careful analysis of all available
relevant information. Such a market could be characterized as being relevantly inefficient.

The characteristics of an efficient security market include: (1) Security prices respond rapidly
and accurately to new information; (2) Trading rules fail to produce superior returns in
simulation experiments; (3) Professional investors fail to produce superior returns
individually or as a group; and (4) Changes in expected returns are driven by time varying
interest rates and risk premia. The combined effect of information coming in a random,
independent fashion and numerous competing investors adjusting stock prices rapidly to
reflect new information means that one would expect price changes to be independent and
random. Since the current prices fully reflect all available information then they are
consistent with the risk involved.

Fama (1970) in the Efficient Market Hypothesis (EMH), categorized the market efficiency
into three levels based on the definition of the available information set namely, the weak
form EMH, the Semi strong form EMH, and the Strong form EMH. In the weak form, only
the past information on prices of shares are reflected, in the semi strong form, it reflects all
publicly available information in securities prices, iincluding the past securities prices and the
announcements of dividend payments, changes in capital structure, change of management
and other event; while the strong form captures ALL information be it external, internal and
even unannounced.

REVIEW OF RELATED LITERATURE

Theoretical Framework

Theory of market efficiency or the efficient market hypothesis provides an appropriate

theoretical framework for the study. According to the theory, share prices on the market place
react fully and instantaneously to all information available (Fama, 1991). According to the
Efficient Market Hypothesis(EMH), an operationally efficient stock market is expected to be
externally and informationally efficient; thus security prices at any point in time are an
unbiased reflection of all the available information on the security’s expected future cash
flows and the risk involved in owning such a security (Reilly & Brown,2003). Such a market
provides accurate signals for resource allocation as market prices represent each security
intrinsic worth. Market prices can at times deviate from the securities true value, but these
deviations are completely random and uncorrelated.

According to Lo (1997) the market efficiency hypothesis stipulates that 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 unforecastable if they are properly
anticipated, that is, if they fully incorporate the expectations and information of all market
participants. It is expected that the more efficient a market, the more random the sequence of
its price movements, with the most efficient market being the one in which prices are

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completely random and unpredictable. In an efficient market information gathering and

information based trading is not profitable as all the available information is already captured
in the market prices. This may leave investors with no incentive as to the gathering and
analyzing of information, for they begin to realize that market prices are an unbiased estimate
of the shares’ intrinsic worth (Fama, 1965; Lo 1997).

The fundamental analysis approach to security valuation posits that at any point in time, an
individual security has an intrinsic value which depends in turn on such fundamental factors
as quality of management, state of the firm’s industry and returns, rate of return on equity and
the general economic outlook. Changes in the values of these variables result in changes in
share values which change follow any definite pattern (an outcome of random walk
behaviour). The existence of these unpredictable future values of shares caused by changes in
values of its fundamentals, to Fama (1965), evidences the existence of efficiency in that stock
market; concluding that the actual price of any security in that market at any point in time is
always a good estimate of its intrinsic value, or the actual values of the securities wandering
randomly about their intrinsic values.

Empirical Review

Obayagbona and Igbinosa (2014) investigated the weak-form market hypothesis in the
emerging capital market of Nigeria from January 2006 to December 2011. It uses three tests
of randomness based on autoregressive technique to check for the presence or otherwise of
autocorrelation in daily stock prices and returns from the Nigerian Stock Market. All the tests
including the Z-statistics for both stock prices and their returns show significant indications
of dependence in return series and hence, of non-randomness. The overall results suggest that
the emerging Nigerian Stock Market is not efficient in the weak form.

Gimba (2012) tested the Weak-form Efficient Market Hypothesis of the NSE by
hypothesizing Normal distribution and Random walk of the return series. Daily and weekly
All Share Index and five most traded and oldest bank stocks of the NSE are examined from
January 2007 to December 2009 for the daily data and from June 2005 to December, 2009 for
the weekly data. The empirical findings derived from the autocorrelation tests for the
observed returns conclusively reject the null hypothesis of the existence of a random walk for
the market index and four out of the five selected individual stocks. In general, it can be
concluded that the NSE stock market is inefficient in the weak form. Given the empirical
evidence that the stock market is weak-form inefficient, it is believed that anomalies in stock
returns could be existent in the market and reduction of transaction cost so as to improve
market activities and minimizing institutional restrictions on trading of securities in the
bourse were therefore recommended.

Okpara (2010) investigate whether Nigerian Stock Exchange (from the period 1984 to 2006)
follows a random walk. To carry out the investigation, the Generalised Autoregressive
Conditional Hetroseskedasticity (GARCH) was employed. The results show that the Nigerian
stock market follows a random walk and is therefore weak form efficient. However, the years
1987, the period of financial deregulation, 1988 when some public companies were
privatised, 1995 the period of internationalisation of the Nigerian capital market and the years
2000 to 2006 recorded persistent volatility clustering suggesting weak form inefficiency in
the market for these periods.

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Afego (2012) examined the weak-form efficient markets hypothesis for the Nigerian stock
market by testing for random walks in the monthly index returns over the period 1984-2009.
The results of the non-parametric runs test show that index returns on the Nigerian Stock
Exchange (NSE) display a predictable component, thus suggesting that traders can earn
superior returns by employing trading rules. The statistically significant deviations from
randomness are also suggestive of suboptimal allocation of investment capital within the
economy. The findings, in general, contradict the weak-form of the efficient markets
hypothesis.

As the movement of stock prices has been found to be random in some capital markets across
the world and in others non-random, Nwidobie (2014) further investigated the random walk
hypothesis in Nigeria. Analysis of all-price-index (API) data of shares of listed firms on the
Nigerian Stock Exchange from January 2000 to December 2012 using the Augmented
Dickey-Fuller (ADF) test shows that share price movements on the Nigerian Stock Exchange
do not follow the random walk pattern described by Fama (1965), and thus the random walk
hypothesis is not supported by findings in the Nigerian capital market. Results also indicate
the existence of market inefficiencies in the Nigerian capital market necessitating the inflow
of cheap and free information about security fundamentals into the market for share pricing
by the forces of demand and supply.

Samuel and Oka (2010) appraised the nature and efficiency of the Nigerian capital market
and its implications for investment analysis and performance. It further examined the
implications of the efficient-market hypothesis and types and levels of market efficiency.
Data was collected using a survey questionnaire. A multi-stage and random sampling
technique was used to select a sample including four categories of people and firms relevant
to the study. Data were analyzed using a Likert scale and descriptive statistics. The null
hypothesis was analyzed using a five-point Likert scale with a 5% error term, and the study
found that information has contributed to the efficiency of the Nigerian capital market to a
great extent. It is therefore suggested that the Nigerian Stock Exchange and the Nigeria
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 while
also committing to continuous training and retraining of their staff.

Osazevbaru (2014) tested for the presence or otherwise of volatility clustering in the Nigerian
stock market. Using time series data of share prices for the period 1995 to 2009, the
Autoregressive Conditional Heteroscedasticity (ARCH) model and Generalized
Autoregressive Conditional Heteroscedasticity (GARCH) model were estimated. The
estimates indicate that the market exhibits volatility clustering. The rate at which the response
function decays is found to be 1.1783 and quite high. It is suggested that aggressive trading
on a wide range of securities be encouraged as this will increase market depth and hence
reduce volatility.

Simons and Laryea (2015) investigated the weak form of the efficient market hypothesis for
four African stock markets – Ghana, Mauritius, Egypt and South Africa. The results of both
parametric and nonparametric tests (Kolmogrov-Smirnov (KS) Goodness of Fit Test, Runs
Test, Auto-Correlation Test, Variance Ratio Test) show that the South African stock market
is weak form efficient, whereas that of Ghana, Mauritius and Egypt are weak form
inefficient. This implies that successive security returns on the South African market are
independent and follow a random walk. The same cannot be said of the other three markets.
Consequently, we also fitted an ARIMA model to the excess return data for Ghana, Mauritius

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and Egypt using the Box-Jenkins method. The ARIMA models are then used to generate one-
period ahead forecasts for the subsequent 12 periods for these three countries. The ARIMA
forecasts in all three countries outperformed the naïve model, corroborating our initial
inefficiency results from the earlier tests.

Udoka (2012) assessed the degree of information efficiency of the market and to suggest
measures that could enhance market efficiency in Nigeria,with the help of monthly time
series data and tested using the ordinary least square estimate procedure. The proposition was
that for any of the parameters LSMP (-1), LSMP (-2), LSMP (-3) LSMP (-6) to be
statistically significant, the market was weak-form efficient. Finding resulting from test of
data has shown that the Nigerian Stock Market is weak-form efficient.

Ezepue and Omar (2012) explored the weak-form efficient market hypothesis for the
Nigerian Stock Market is using different statistical tests including Runs Test, Autocorrelation
Function Test, Ljung-Box Q-Statistics (Box-Pierce Q [BPQ] Test), BDS (Brock-Dechert-
Scheinkman) Test for Independence of Returns. The analyses use overall stock market
returns collected over the period 2000–2010. It is shown that the NSM is not weak-form
efficient which questions the benefits of the 2004 financial reforms. It is also shown that the
degree of market inefficiency varies across the periods corresponding to the financial reforms
and 2007 global financial crisis, for daily and monthly returns.

Kumar and Singh (2013) investigated to know that whether Indian stock Market is efficient
or inefficient particularly at weak level. The data employed was the daily closing values of
the S&P CNX Nifty and CNX Nifty Junior for the sample period of 1 January 2000 to 31
March 2013, tested with Unit Root Test (ADF & PP), Run Test, Kolmogorov-Smirnov (KS)
Test. The results showed that Indian Stock markets do not exhibit weak from of market
efficiency. Shafi (2014) employed a study period of 11 Years 2003-2013 with NSE (NIFTY)
as a bench mark, a host of tests (parametric as well as non-parametric) to test market
efficiency in Indian Capital market in the weak-form. Daily return of 50 Nifty Stocks for 11
years yields 2742 which have been utilized for various analysis to test whether Indian Capital
Market is efficient in Weak Form or not. All Tests including run tests, autocorrelation tests
reveal that Indian Capital Markets are inefficient in the weak form.

Patel, Radadia and Dhawan (2012) investigated the weak form of market efficiency of Asian
four selected stock markets. We have taken a daily closing price of stock markets under the
study from the 1st January 2000 to 31st March 2011 and also divided full sample in three
interval periods, and have applied various test like Runs Test, Unit Root Test, Variance Ratio,
Auto Correlation and other test. BSE has given the highest mean returns to the investor
followed by SSE Composite and HANGSENG. BSE Sensex could be considered as high risk
markets as it has reported the highest Standard Deviation. During the period BSE,
HANGSENG and SSE Composite markets showed positive average daily returns except
NIKKEI. The Runs Test indicated BSE and NIKKEI markets are weak form inefficient
whereas HANSENG and SSE Composite hold weak form of efficiency. The time series for
the full as well as sample period didnot have a presence of unit root in the markets
understudy. According to Autocorrelation test it is inferred that the equity markets of the
Asian region under thestudy remained inefficient for some lag whereas they were efficient for
the other lag.

Emenike (2008) examined the Weak-Form Efficient Market Hypothesis across time for the
Nigerian Stock Exchange (NSE) by hypothesizing Normal Distribution and Random walk in

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periodic return series. Monthly all share indices of the NSE are examined for three periods
including January 1985 to December 1992, January 1993 to December 1999, and January
2000 to December 2007. Our Normality tests are conducted using Skewness, Kurtosis,
Kolmogorov-Smirnov, and Q-Q Normal Chart; 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 in all the periods. Runs test results reject the randomness of the
return series of the NSE in the periods studied. Overall results from the tests suggest that the
NSE is not Weak-Form efficient across the time periods of this study. The results however,
show that improvements in NSE trading system have positive effect on efficiency. Relaxing
institutional restrictions on trading securities in the market and strengthening the regulatory
capacities of NSE and Nigerian Securities and Exchange Commission (NSEC) to enforce
market discipline were recommended.

Methodology

The study adopts an ex-post- facto research design. The study is because the data is based on
historical information obtainable from the official records of the stock exchange. This study
used the monthly all share index data for the Nigerian stock exchange (NSE). The All share
index includes all listings on the exchange. Additionally, we use index prices, rather than
individual stock prices, to provide market-wide evidence. The index is in local currency and
the data consists of 360observations spanning the period January 1985 to December 2014.
The data was sourced from the Central Bank of Nigeria Statistical Bulletin, 2014. The
monthly Stock market indicesare converted into stock market returns using the formula
below:
Rmt= Ln(Pt / Pt-1)*100...................................................................... (1)
Where: Rmt represents monthly market returns for period t, Ptand Pt-1denote market prices for
period t and period t-1 respectively and Ln denotes natural logarithm. We use this log
transformation to convert our data into continuously compounded rates. This practice is
common rather than using discrete compounding.

Model Specification

The study used a simple autoregressive model where the dependent variable is hypothesized
to depend on its own past values. This helps to identify the presence or otherwise of
autocorrelation in the model. The specified model is as follows:
yt = a0+yt-1b+et......................................................................................................................................(2)
Where: y = Monthly stock prices or returns which the dependent variable.
e = the residuals. t = Time (monthly in this case), yt-1=Monthly stock prices or returns in the
previous year is the independent variable in the above model.a= constant; b = coefficient of
the relationship between y and yt-1.

Method of Data Analyses

To check the weak form efficiency of Nigerian Stock Market (ASI), the study has relied on a
number of statistical and econometric tools. The study has relied on descriptive statistics,
runs test, Augmented Dickey Fuller test, and simple regression test for analyzing the data.

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Presentation of Data and Discussion

The data for the study is the monthly All Share Index of the Nigerian Stock Market. The data
covers a period of 1985 and 2014; subdivided into clusters. The first cluster is 1985 to 1992
(96 monthly data observations); the second cluster is 1993 to 1999 (84 monthly data
observations); the third cluster runs through 2000 to 2010 (132 monthly data observations)
while the fourth cluster covers 2011 to 2014 (48 monthly data observations). The essence of
the clusters is to find out whether one period is more efficient than other in the Nigerians
stock market. In total, the data are 360 observations of the monthly All Share index of the
Nigeria Stock Market.

The data from the monthly All Share Index was converted to Stock Market Returns using the
formula Rmt= Ln(Pt /Pt-1), where Rmt is the monthly market return for period t,. The analysis
of the study was based on the stock market returns. The ASI and the computed stock market
returns are shown on appendix 1.

Table 1: Descriptive Statistics: Monthly returns of NSE All Share Index (ASI)
stock return stock stock stock All Period
(1985 to return return return stock
1992) (1993 to (2000 to (2011 to return
1999) 2010) 2014) (1998 to
2014)
Mean 0.024183 0.018557 0.011726 0.006992 0.015988
Median 0.019800 0.016250 0.006950 0.005150 0.016300
Maximum 0.240400 0.184800 0.323500 0.126100 0.323500
Minimum -0.230400 -0.185800 -0.365900 -0.102900 -0.365900
Std. Dev. 0.046192 0.049209 0.076966 0.050966 0.060558
Skewness 0.194179 -0.123598 -0.579555 0.155581 -0.499774
Kurtosis 18.96280 6.983453 8.625031 2.914011 10.92941

Jarque-Bera 1009.224 55.75152 181.4148 0.208432 955.4578

Probability 0.000000 0.000000 0.000000 0.901031 0.000000

Sum 2.297400 1.558800 1.547800 0.335600 5.739600

Sum Sq. 0.200571
Dev. 0.200984 0.776010 0.122085 1.312868

Observation 95
s 84 132 48 359
Source:Authors’ computation with the use ofE-view 7.0

The descriptive statistics of the stock market returns of the Nigerian Stock Market is
presented on Table 1 above. Normality of distribution is one of the basic assumptions
underlying the weak-form efficiency (Simons and Laryea, 2006). Thus, if NSE monthly
returns follow normal distribution, it means that we cannot predict the future price or returns
from the mean of today’s price or return. When this happens, we shall conclude that the NSE
is weak-form efficient, otherwise, we say that the market is weak-form inefficient. Mean,
standard deviation, Skewness, kurtosis, and Jarque-Bera have been used to test the hypothesis
of normality of the study. The results show that the returns are not normally distributed.

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Mean stock returns are positive with large volatility (standard deviation) for all countries.
This suggests that the stock market is highly risky.

Generally, values for skewness (zero) and kurtosis (3) represents that the observed
distribution is perfectly normally distributed. The kurtosis coefficient (10.92941) for the
whole period (1985 to 2014) is a peaked distribution and negative skewness (-0.499774).
Cluster 1 has peaked kurtosis(18.96280) and positive skewness (0.194179), cluster 2 has
peaked kurtosis 6.983453 and negative skewness (-0.123598), cluster 3 has peaked kurtosis
8.625031 and negative skewness (-0.579555), while cluster 4 has flat 2.914011kurtosis and
positive skewness (0.155581). These show the presence of leptokurtic distribution in cluster 4
and playtykurtic distribution in all the other clusters and the All-time period.

As the value of skewness and kurtosis of stock return series of NSE are not equal to 0 and 3
respectively, this suggests that data are not normally distributed. Though, one may be
tempted to accept the null hypothesis for cluster 4 with kurtosis very close to 3, we reject the
null hypothesis of normality. From the results of the calculated Jarque-Bera statistics and p-
values in the table 2, the p-values for all the indices (except cluster 4) are less than (0.01) at
the 1% level of significance imply that the null hypothesis cannot be accepted. Thus, the
hypothesis of normal distribution is rejected at the conventional 5% level for all the period,
cluster 1, 2 and 3 and accepted for cluster 4. Therefore, this suggests that the returns of the
NSE do not follow the theory of random walk.

Table 2: Unit Root Test Augmented Dickey-Fuller (ADF Test)

At Level with Constant, No trend
t-Statistic [Link]
Stock return (1985 to 1992) -12.45684* 0.0001
Stock return (1993 to 1999) -3.343005* 0.0160
Stock return (2000 to 2010) -9.834589* 0.0000
Stock return (2011 to 2014) -5.618203* 0.0000
All Period stock return (1998 to 2014) -6.149308* 0.0000
Test critical values: 1% level -3.501445
5% level -2.892536
10% level -2.583371
Source: Authors’ computation with the use ofE-view 7.0

To further investigate the randomness of the series, theADF test is employed. The ADF is
primarily used to check whether a given series is stationary or non-stationary. According to
Shafi (2014),“if the series is found to be non-stationary, then the null hypothesis of the
market being random will be accepted”. He further proposed that the ADF test is given as a t-
statistic which is generally negative and that the more negative the t-statistic, higher are the
chances of rejecting the null hypothesis. The results give as t-statistic is compared with the
critical values calculated at particular level of significance. The test critical values are
calculated at 1%, 5%. 10%.If the t-statistic is less than the critical value calculated at a given
critical level, the Researcher has to reject the null hypothesis of the series being random.

The Augmented Dickey Fuller t-statistic has the test critical values at 1%, 5% and 10% were
equal to -3.501445, -2.892536, and -2.583371 respectively. The t-statistic for Stock return
(1985 to 1992) is -12.45684, Stock return (1993 to 1999) is -3.343005, Stock return (2000 to
2010) is -9.834589, Stock return (2011 to 2014) is -5.618203 and All Period stock return
(1998 to 2014) is -6.149308. At a significance level of 5%, the null hypothesis of the data

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being non-stationary is rejected because the ADF t-statistic is too [Link] in all, both the
Unit Root Test (i.e. the ADF test) revealed that the input series of data is not non-stationary
and so the null hypothesis of the Nigerian Stock Markets being random has to be rejected.

Table 3: Regression Model for relationship between Future returns and previous
returns in Nigerian Stock Exchange
Dependent Variable: STOCKREURNS (y)
Method: Least Squares
Date: 06/16/16 Time: 05:44
Sample (adjusted): 1985M02 2014M11
Included observations: 358 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

Yt-1 0.154760 0.052359 2.955724 0.0033

C 0.013546 0.003280 4.130209 0.0000

R-squared 0.023952 Mean dependent var 0.016023

Adjusted R-squared 0.021211 S.D. dependent var 0.060639
S.E. of regression 0.059992 Akaike info criterion -2.783636
Sum squared resid 1.281264 Schwarz criterion -2.761957
Log likelihood 500.2708 Hannan-Quinn criter. -2.775014
F-statistic 8.736304 Durbin-Watson stat 2.045314
Prob(F-statistic) 0.003327

Source: Authors’ computation with the use ofE-view 7.0

The result on table 3 shows the relationship between Future returns and previous returns as
hypothesised in the modelyt = a0+yt-1b+et..................................................(2)
From the table, the equation of the relationship is:
yt = 0.0135+0.1547b.................................................................(3)
Where: y is the future returns, 0.1547b is the coefficient of the previous return. Thus, the
relationship between previous return (yt-1)and future return (y) is 0.1547b. This shows that
there is a positive relationship between future stock return and previous return. This implies
as unit rise in previous month stock return will lead to about 15% rise in the next month
return. Also, a unit fall in previous return will lead to 15% in next month return.

The Durbin Watson is 2.04 which indicate that there is no autocorrelation in the mode. Thus
we say that the model is sound for predict purposes. The value of the R2 (coefficient of
determination) is 0.023and implies that only 0.23% of change in future stock return is
explained by previous return. This explanatory power is too low to enable investor to predict
the market without risk. However, the t-value is significant at 5%. Also, the F-value is
statistically significant at 5%. These indicate that there is a significant positive relationship
between previous stock returns and future stock returns in Nigeria. This implies that we can
predict future stock returns from previous trends based on 15% positive relationship and 0.23
predictive powers.

CONCLUSION

The findings from the study has shown that the NSE was not efficient in the weak form
between 1985 to 2010 but seem to improved into weak form efficient in the recent times 2011

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to 2014. This means that share price movements on the Nigerian Stock Exchange which
previously do not follow the random walk pattern described by Fama (1965), has improved
and is becoming efficient. This indicates that the price changes of the securities were not
independent before 2011 and therefore technical analysis was very much viable. The result
in the 2011 to 2014 periods suggest Nigerian stock market is no longer easily exploitable,
making it difficult for arbitrage portfolios to be constructed based on trading rules in the
recent times. That stock market was inefficient between 19985-2010 seem to suggest possible
inherent characteristics, such as low liquidity, thin and infrequent trading, and lack of
experienced market participants. The finding shows that there is improvement in these
characteristics in Nigeria. As it were in the old when the Best strategy would be to identify a
value stock and to buy and hold the same for long periods so as to earn fair return on
investment, has becomes less obtainable.

RECOMMENDATIONS

To further improve the efficiency of the Nigerian stock market, the following
recommendations are preferred: The Securities and Exchange Commission should take a
leading role in regulating abnormal financial activities. In the meantime, an inefficient market
could suffer over inflated stock prices, speculation, and insider trading, all potentially
intensified by herding behaviour. These problems could be addressed by the SEC. Market
operators culpable for insider trading offences should be punished to ensure availability of
information on securities to the market allowing the free interplay of demand and supply to
determine security values as current market values of securities on the NSE reflect available
security information. Information security fundamentals should be provided by issuers as at
when due for security valuation; Capital market regulators should ensure that information
provided in the market are correct; Laws to protect investors and guard against manipulation
of information in the Nigerian capital market should be promulgated and enforced.

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Appendix: All Share Index and the Computed Stock Market Returns of quoted
companies in Nigeria (1985 to 2014).
Ln(Pt/Pt-1) (Stock
SN Years ASI (Pt/Pt-1) Market Returns)
1 1985 111.30
2 1986 112.20 1.00809 0.0081
3 1987 113.40 1.0107 0.0106
4 1988 115.60 1.0194 0.0192
5 1989 116.50 1.00779 0.0078
6 1990 116.30 0.99828 -0.0017
7 1991 117.20 1.00774 0.0077
8 1992 117.00 0.99829 -0.0017
9 1993 116.90 0.99915 -0.0009
10 1994 119.10 1.01882 0.0186
11 1995 124.60 1.04618 0.0451
12 1996 127.30 1.02167 0.0214
13 1997 134.60 1.05734 0.0558
14 1998 139.70 1.03789 0.0372
15 1999 140.80 1.00787 0.0078
16 2000 146.20 1.03835 0.0376
17 2001 144.20 0.98632 -0.0138
18 2002 147.40 1.02219 0.0219
19 2003 150.90 1.02374 0.0235
20 2004 151.00 1.00066 0.0007
21 2005 155.00 1.02649 0.0261
22 2006 160.90 1.03806 0.0374
23 2007 163.30 1.01492 0.0148
24 2008 163.80 1.00306 0.0031
25 2009 166.90 1.01893 0.0187
26 2010 166.20 0.99581 -0.0042
27 2011 161.70 0.97292 -0.0274
28 2012 157.50 0.97403 -0.0263
29 2013 154.20 0.97905 -0.0212
30 2014 196.10 1.27173 0.2404

Source: Extract from CBN Statistical Bulletin, 2014 online version (All
Share Index on the Nigerian Stock Exchange)

Progressive Academic Publishing, UK Page 105 [Link]

Market Efficiency in the Nigerian and Ghanaian Stock Markets
by
1. Adebanjo J. FALAYE ,
Landmark University, Nigeria.
[Link]@[Link]
+2348069424466

2. Gift Eboigbe,
Landmark University, Nigeria
[Link]@[Link]

3. Oluwasegun ESEYIN,
Landmark University, Nigeria.
[Link]@[Link]

4. Abimbola ADEMOLA,
Landmark University, Nigeria.
[Link]@[Link]

5. Adegbola OTEKUNRIN,
Landmark University, Nigeria.
[Link]@[Link]

6. Olufemi Peter ADEYEYE,

Federal University of Oye, Nigeria.
[Link]@[Link]

7. Peter OGUNLADE,
Landmark University, Nigeria
[Link]@[Link]

1
Abstract
In literature, there has not been a known comparative study published on Nigeria and Ghana stock markets. The
study is considerably important to enable a fair comparison of the level of improvement on the Ghanaian and
Nigerian Stock-Exchanges. We observed market responsiveness to information. We engaged Partial
Autocorrelation in testing the independence of prices. We used One-sample Kolmogorov Smirnov to investigate
recognizable trends in movement of prices. Price movements were found independent in these two markets.
Results of the Partial Auto Correlation’s test show independent movements of prices. However, Runs and
Distribution patterns display prices movement, which is not completely random. Study shows that the two markets
are similar in every respect as they both exhibit independence in stock movements, show non-randomness as well
as the presence of observable trends within the period under study. We conclude that no one could really draw a
line of difference between the two markets.

Keywords
efficient market; stock exchange; price movement; information-efficient

Introduction
Efficient market hypothesis holds that no investor is able to sustain reaping of abnormal profits when all investors
are well informed of the existence of an accruable abnormal profit at a particular segment of the market. They
would all rush into such investment to reap of the profit; thereby, they increase the demand for such an investment;
and thereby force out the abnormal yield.

Even though the strong form efficient market holds to the believe that no investor can earn any excess returns, the
hypothesis holds that efficiency can be at its strong, semi-strong, or its weak form. It is at its strong form when no
one earns any excess profit no matter the form of analysis employed, but at its weak form when some fundamental
analyses enable excess returns; even if on a very short term. This implies therefore that the hypothesis asserts that
excess returns can be earned on the capital market when strategies based on historical share prices are used. It
implies that the hypothesis does not subscribe to the fact that technical analysis techniques will be able to
consistently produce excess returns. It avers that there are no patterns to assets’ prices. That is, future price
movements are random; they are determined by unexpected information.

Thus, it can be said that stock market efficiency basically concerns the nexus between prices of shares and
information. In the words of Markowitz, as Akinsulire (2003) puts it, the efficiency of the market can be discussed
or measured in categories. In the categories are the strong-form of efficiency, the semi-strong form, and the weak-
form of efficiency as Fama (1970) defines it. At the weak form, prices are random. No historical price pattern could
be studied and utilized to enable abnormal profits. Daily prices are independent of one another. Future earnings
cannot be predicted accurately. There is no pre-assumption of potential price rallying. Hence, one could say that
market efficiency is uncertain.

Study objectives

2
The central aim of the study is to find out degree of proficiency that exists in the Nigeria and Ghana stock markets. The specific objective
is to investigate the extent to which the movement of stock prices in the two markets depends on previous stocks’ prices movements; and
compare the two. Equally, study set out to examine whether successive stocks’ price movements in the two markets are random. That is,
it set out to determine the extent to which there are observable patterns in the movements of prices in the two stock markets.

Research hypothesis
H01: Movement of prices in the two markets are not independent.
H02: Movement of in both markets are not random.

Empirical evidence
Ignited by Fama (1965)’s study of the American stock market, series of researchers have examined the efficiency of different markets,
but with diverse results. For instance, Vitali and Mollah (2010) studied the random walk hypothesis on Egypt, Morocco, Kenya, Mauritius,
South Africa, Tunisia and Nigeria from 1999 to 2009. Results obtained rejected the hypothesis. Only South Africa bourse proved market
efficient; even at weak-form. The results suggest that prices of stocks do not fully reflect all historical info. Aga and Kocaman (2008)
examined the efficiency of Istanbul stock market, with index-20, for a period of 20 years: 1986 – 2005. The analysis confirmed the
existence of weak-form efficieny. That is a departure from Vitali and Mollah (2010).

Bhattacharya and Murherjee (2002) investigated the causal link between stock prices and financial market aggregates in India, using
Granger causality tests. They found no causal link between stock prices and money supply, national income, nor interest rates. Moreover,
they found a two-way causation between share prices and inflation. The study perceived Indian market tended towards efficiency.

Dragota et al (2009) appraised Romanian capital market. They used daily and weekly returns of 18 quoted firms. In addition, Dragota et
al (2009) equally assessed daily and weekly market returns, using multiple variables ratio, and found that most of the stock prices were
information efficient.

Vosvorda et al (1998) and Nwosa and Oseni (2011) could not find stock prices reflect random walk on Prague and Nigeria stock markets
rerspectively. These are in tandem with the finding of Macskai and Molnar (1996). Macskai and Molnar (1996) utilised Ljung-Box Q
Statistics to test the degree of efficiency on the Budapest stock exchange, and found traders making excessively high returns.

Afego (2012) studied the Nigerian stock market, testing for random walk, using monthly index returns over 25 years (1984 - 2009). He
conducted non-parametric runs. He found the market inefficient; even in the weak-form. This is contrary to the report of Ajao and Osayuwu
(2012). Ajao and Osayuwu (2012) analysed efficiency of the market using all securities being traded on the stock exchange, and the
month-end All Share Index of ten years (2001 - 2010). Serial Correlation technique was utilized to observe independence of price
movements, the distributive pattern, and runs test for randomness. The duo found Nigeria stock market efficient; though it was at weak-
form.

Olowe (1999) too analysed monthly data obtained from 59 randomly selected securities from 1981 to 1992 on the Nigerian stock exchange.
Olowe (1999) found the market conformed with the weak-form efficiency. Nevertheless, Olowe doubted if the market could pass more
stringent statistical tests. Apart from Olowe (1999), some other studies on the efficiency of the Nigerian stock market, Ekechi (2002),
Inegbedion (2009), Aguebor et al (2010) and Rapuluchukwu (2010), averred that the Nigerian stock market is efficient in the weak-form.

3
Ekechi (2002), Aguebor (2010), and Inegbedion (2009) show that the Nigerian bourse was not efficient even in the weak-form. A cursory
look on the reports show that all studies reporting that the Nigerian stock market is efficient in the weak-form used All Share index, while
those reporting inefficiency used just samples of selected securities (Ajao and Osayuwu, 2012)

Research design
The data analysed for study were mostly sourced from internet. The publications of the Nigerian stock market, newspapers, publications
of the Central Bank of Nigeria, the monthly All Share Index used were sourced from the CBNs Statistical Bulletins. The Ghana stock
exchange composite index was sourced from Ghanaian stock exchange. The population of this study comprised the Nigerian and Ghanaian
markets. Samples include monthly published all shares’ indexes and the Ghana composite index. The NSE All-Shares Index and the
Ghanaian Stock Exchange Composite Index depict the behaviours of ordinary shares that are quoted on the Exchanges. These provide a
complete representation of the market. The market index indicate direction of the markets and capitulates the scope of their movements.

The Nigerian Stock Exchange’s All-Shares’ Index and the Ghana Stock Exchange’s Composite Index are used as performance indicators
for study. Two are the aggregations of shares’ price gains and losses on trading. They constitute appropriate measures of stock price
changes; required to determine market efficiency.

Model specification
𝑛∑𝑥𝑦−∑𝑥∑𝑦
ri=
√[𝑛∑𝑥𝑖 2 −(∑𝑥𝑖)2 ][𝑛∑𝑦𝑖 2 −(∑𝑦𝑖)2 ]

Q = n∑𝑟𝑖 2

Where:
Q = Box-pierce statistic
ri = serial correlation coefficient (the ith lag)
n = sample size (financial security)

The Box-pierce statistics follow chi-square distribution with ‘m’ degree of freedom; ‘m’ is the number of lags.

Test for randomness of prices

𝑅+ 0.5+𝑅;
Z=
𝑆𝑅

Where:
R = number of runs (stock price changes)
R = (2N1N2/N1+N2) + 1 = mean number of price changes
SR = 2N1N1 (2N1N2 - N1 – N2) / (N1+N2) 2(N1+N2 - 1)

Where:
N1 = number of positive price changes
N2 = number of negative price changes
SR = standard deviation of the distribution (number of price changes)

Data analysis
4
We examined the unit root of data and obtained the following result. We used Augmented Dickey Fuller for the examination. We adjusted
data for stationarity by integrating once, due to failure of Augmented Dickey Fuller stationarity test. It was after the adjustment that we
conducted the analysis.

Table A. All Share Index (Nigeria). Month ends (2004-2014)

JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC

2004 22,712 24,797 22,896. 25,793 27,730. 28,887. 27,061. 23,77 22,739 23,354 23,270 23,844
.9 .40 40 .00 80 40 10 4.30 .70 .80 .50 .50

2005 21,953 20,682 21,961 21,482. 21,564. 21,911. 22,93 24,635 25,873 24,355 24,085
23,078 .50 .70 10 80 00 5.40 .90 .80 .90 .80
.3

2006 23,843 23,336. 23,301 24,745. 26,316. 27,880. 33,09 32,554 32,643 32,632 33,189
23,679 .00 60 .20 70 10 50 6.40 .60 .70 .50 .30
.4

2007 40,730 43,456. 47,124 49,930. 51,330. 53,021. 50,29 50,229 50,201 54,189 57,990
36,784 .70 10 .00 20 50 70 1.10 .00 .80 .90 .20
.5

2008 54,189 65,652 63,016. 59,440 58,929. 55,949. 53,110. 47,78 46,216 36,325 33,025 31,450
.92 .38 56 .91 02 00 91 9.20 .13 .86 .75 .78

2009 21,813 23,377 19,851. 21,491 29,700. 26,861. 25,286. 23,00 22,065 21,804 21,010 20,827
.76 .14 89 .11 24 55 61 9.10 .00 .69 .29 .17

2010 22,594 22,985 25,966. 26,435 26,183. 25,384. 25,844. 24,26 23,050 25,042 24,764 24,770
.90 .00 25 .20 21 14 20 8.20 .60 .20 .70 .52

2011 26,830 26,016 24,621. 25,041 25,866. 24,980. 23,827. 21,49 20,373 20,935 20,003 20,730
.70 .80 20 .70 60 20 00 7.60 .00 .00 .40 .60

5
 2012 20,875 20,123 20,562. 22,045 22,066. 21,599. 23,061. 23,75 26,011 26,430 26,494 28,078
.80 .50 50 .70 40 60 40 0.80 .60 .90 .40 .80

2013 31853. 33,075 33,536. 38,485 41,474. 42,482. 42,097. 41,53 36,585 37,622 38,920 41,329
18 .14 25 .56 40 48 49 2.31 .08 .74 .85 .19

2014 40,571 39,558 38,748. 38,485 41,474. 42,482. 42,097. 41,53 41,210 37,550 34,543 34,657
.62 .89 01 .56 40 48 49 2.31 .10 .24 .05 .15

Source: CBN Statistical Bulletin 2014

Unit root test

Table B. Result of the unit root test
Augmented Dickey Fuller (ADF)

Variables Test Statistic Probability Status Remark

ASI 1st Difference -4.180128 0.0010 1(1) Stationary

GSE-CI 1st Difference -9.842816 0.0000 1(1) Stationary

On the table above, the ADF test shows that both the ASI and GSE-CI are stationary at first difference. Thus, the 1st difference of the
variables are used to perform the analysis to obtain normal results.

Test of hypotheses
We used Partial Autocorrelation to test for individuality of prices in the market. Equally, we used Ljung-Box and the Box-Pierce to test
for the significance of autocorrelation coefficients. Based on the outcomes of the series of tests conducted we arrive at the following
conclusions.

Hypothesis 1: The movement of prices in the market is not independent.

Test Statistics: (i) Partial Autocorrelation test (PACF)
(ii) Autocorrelation test (ACF).

Lag Partial Autocorrelation Std. error

1 .153 .087

2 .194 .087

3 .204 .087

6
Table C Result 4 -.173 .087 of Partial Autocorrelations

5 .086 .087

6 -.040 .087

7 .123 .087

8 -.136 .087
Fig 1: Partial Autocorrelation 2 Standard Error Test
9 .132 .087

10 .051 .087

11 -.107 .087

12 -.029 .087

As seen in Fig.1, lags 2 and 3 of these 12 lags violate the two standard error limits; lag 4 is only just within. All the remaining 9 lags fall
inside the range. Thus, a significant percentage of the 12 lags (above 75%) are within the two standard errors limit. Hence, we accept the
null hypothesis. We conclude at 95% confidence level that movement of prices in the stock market is independent.

Table D. Autocorrelations
Lag Autocorrelation Std. errorᵃ Box-Ljung Statistic

7
 Value Df Sig.ᵇ Remark

1 .153 .086 3.154 1 .0.76 Not significant

2 .213 .086 9.255 2 .0.10 Significant

3 .248 .086 17.623 3 .001 Significant

4 -.086 .085 18.254 4 .001 Significant

5 .136 .085 20.819 5 .001 Significant

6 -.004 .085 20.821 6 .002 Significant

7 .084 .084 21.821 7 .003 Significant

8 -.035 .084 21.999 8 .005 Significant

9 .079 .084 22.893 9 .006 Significant

10 112 .083 24.709 10 .006 Significant

11 -.108 .083 26.416 11 .006 Significant

12 .064 .083 27.018 12 .008 Significant

The Box-Ljung statistics as contained in the Autocorrelation test show that only the 1st lag is not significant. Results of the Box-Pierce Q
statistics show that the overall significance of the test is poor; the tabulated value of the Box-pierce Q is higher than the calculated value.
Hence, we accept null hypothesis. Therefore, it is reasonable to conclude that at 95% confidence level, the changes in prices of stocks
traded on the floor of the Stock Exchange are independent. This result is consistent with that of the partial autocorrelation test.

Q = n∑ri2 where n is the sample size

What informs the use of this statistics is that high sample autocorrelations lead to large values of Q. If the calculated value of Q exceeds
the appropriate value in a χ2 table, we reject the null hypothesis. This implies the acceptance of the alternative hypothesis; that at the
minimum, one autocorrelation is not zero.

Table E: Box-pierce statistics

0.1532 0.023409

0.2132 0.045369

0.2482 0.061504

-0.0862 -0.007396

0.1362 0.018496

-0.0042 -0.000016

8
 0.0842 0.007056

-0.0352 -0.001225

0.0792 0.006241

0.1122 0.012544

-0.1082 -0.011664

0.0642 0.004096

∑
=0.158414

Q = 0.158414 × 132
Q = 20.911
Box-pierce statistic~𝜒∝2 , m
∝ = 0.05
2
Bp~𝜒0.05 , 12 = 21.026
Bp > 𝜒∝2 , m
Hence, we admit null hypothesis; since Q > Bp
This implies that changes in prices of stocks are dependent. Hence, investors can predict future price movement from past stock prices.
Hence, the Nigerian stock market lacks efficiency; even at the weak-form.

Test for randomness

Hypothesis 2: The movement of prices not random.

Table F Runs test

VAR00001

Test value 31568.9164

Cases< Test value 80

Cases>= Test value 52

Total Cases 132

Number of runs 4

Z -10.988

[Link].(2-tailed) .000

As shown in Table F the calculated value of the Z-statistic is -10.988 with an associated asymptotic significance (2-tailed probability of
0.000). Therefore, the null hypothesis is accepted at 1% level. Thus, at 99% confidence level, we conclude that the stock price movement
in the stock market is not random.

9
Although the results from this study contradict few previous studies already done on the Nigerian Stock Exchange, which have employed
the Runs test, they are consistent with many others like Appiah-Kusi and Menyah (2003), Smith (2008), Emenike (2008), and Mollah and
Vitali (2011). Given that African Stock Markets, including the Nigerian stock exchange, are bothered by problems of thin trading, lack of
market transparency and poor regulatory standards (Mlambo and Biekpe, 2005). Therefore, the results reported in this study are not
inconsistent with expectations.

Distribution patterns
The normal curve in Fig. 2 shows that the distribution Patterns is asymmetrical, since the shape of the curve to the left of the line of
symmetry is conspicuously different from the shape to the right of the line of symmetry. The implication is that the distribution pattern of
the Stock price movement is not Random. This is consistent with the result of the Runs test earlier carried out.

Test for observable trend

Hypothesis 3: There is no observable trend in the movement of stock prices in the Nigerian stock market. This test was carried out using
the one-sample Kolmogorov smirnov test.

Table G. Result of the One-Sample Kolmogorov Smirnov test

N 132

Normal Parametersᵃ,ᵇ Mean 31568.9164

Std. Deviation 11177.58123

Most Extreme Absolute .217

Differences
Positive .217

Negative -.147

Kolmogorov-smirnov Z 2.497

[Link].(2-tailed) .000

One-sample Kolmogorov-Smirnov test

As shown in Table G, Kolmogorov-Smirnov calculated value of the Kolmogorov-Smirnov Z is 2.496 with an associated asymptotic
significance (2-tailed probability of 0.000). as a result of this, the null hypothesis is rejected. The implication is that we conclude at the
99% confidence level that there is an observable trend in the pattern of price movement in the market.

Discussion of findings relative to Nigerian Stock Exchange

The results of the autocorrelation and partial autocorrelation tests indicate that the movement of stock prices in the Nigerian stock market
is independent. This implies it is impossible for investors to use previous stock price movements to predict potential prices or use today’s
stock price movement to predict future prices. Contrarily, the results of the runs test and distribution patterns of price changes show that
price movement is not random; thus signalling that the Nigerian stock market is not efficient, even in the weak form. In other words, it is
possible for investors to beat the market; that is, make gains on the basis of privileged information. Although this result is inconsistent
with those of Olowe (1999) and Rapuluchukwu (2010); it is consistent with the findings of Ekechi (2002) and Inegbedion (2009).
10
Test of hypotheses for the Ghana stock market
The same tests that was carried out for the Nigerian bourse was also carried out for the Ghana Stock Market. The aim is to promote fair
comparison of the two markets.

Table H. Data presentation [Ghanaian Composite Index (GSE-CI)] Months end (2004-2014)
JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC

200 3,798. 4,633. 4,633.1 6,543. 6,853. 7,045. 7,125.0 7,316. 6,997. 6,932. 6,747. 6,798.
4 06 14 4 95 00 40 5 31 79 90 41 60

200 6,889. 6,737. 6,453.8 6,108. 6,050. 5,862. 5,019.6 4,836. 4,880. 4,903. 4,801. 4,778.
5 44 21 4 19 03 74 6 56 06 68 89 07

200 4,702. 4,739. 4,773.2 4,791. 4,855. 4,851. 4,903.1 4,932. 4,963. 4,993. 5,013. 5,026.
6 60 60 8 74 26 32 9 18 00 93 71 80

200 5,032. 5,065. 5,113.1 5,162. 5,247. 5,318. 5,368.7 5,587. 5,675. 5,837. 6,381. 6,595.
7 95 75 5 19 18 29 1 94 91 58 27 63

200 6,718. 7,011. 7,851.5 9,344. 9,812. 10,34 10,655. 10,812 10,921 10,781 10,573 10,43
8 48 03 4 69 26 9.68 21 .91 .46 .02 .43 1.64

200 10,220 9,836. 9,247.1 8,822. 7,496. 5,423. 5,230.4 5,900. 6,292. 5,378. 5,386. 5,572.
9 .99 84 7 91 02 03 9 41 14 72 48 34

201 5,625. 5,541. 6,014.3 6,518. 7,172. 6,591. 6,394.0 6,821. 6,835. 6,886. 7,101. 7,369.
0 42 15 4 88 08 10 2 80 71 31 23 21

201 1,057. 1,051. 1,071.5 1,100. 1,162. 1,188. 1,170.8 1,145. 1,098. 1,007. 987.26 969.0
1 14 83 0 38 78 91 5 12 38 86 3

201 974.53 1,016. 1,046.8 1,056. 1,022. 1,045. 1,027.7 1,025. 1,047. 1,116. 1,133. 1,199.
2 47 8 10 95 48 8 90 72 27 47 72

11
201 1,270. 1,482. 1,733.4 1,800. 1,884. 1,880. 1,936.2 1,989. 2,030. 2,099. 2,123. 2,145.
3 72 26 7 66 26 26 9 55 96 88 75 20

201 2,255. 2,420. 2,386.3 2,255. 2,319. 2,373. 2,300.3 2,200. 2,239. 2,249. 2,266. 2,261.
4 52 91 4 27 12 38 5 18 68 33 92 02

Source: Annual Reports Ghana

Table I. Results of the partial Autocorrelation

Lag Partial Autocorrelation Std. error

1 .145 .087

2 .012 .087

3 .042 .087

4 .073 .087

5 -.024 .087

6 .022 .087

7 .062 .087

8 -.068 .087

9 -.062 .087

10 -.117 .087

11 -.051 .087

12 -.032 .087

12
Fig 3: Partial Autocorrelation 2 Standard Error Test
Result in Fig 3 shows that out of the 12lags, none of them violate the two standard error limits, but are all within the range. The implication
of this is that the degree of independence of the stock price movement is maximal. Hence, we accept null hypothesis. We therefore
conclude that at the 95% confidence level the movement of prices in the Ghana Stock Exchange is independent.

Table J. Result of the Auto correlation test

Lag Autocorrelation Std. Box-Ljung statistic
Errorᵃ
Value Df Sig.ᵇ Remark

1 .145 .086 2.804 1 .094 Not significant

2 -.033 .086 2.951 2 .224 Not significant

3 .048 .086 3.261 3 .353 Not significant

4 .084 .085 4.234 4 .375 Not significant

5 .000 .085 4.234 5 .516 Not significant

6 .022 .085 4.303 6 .636 Not significant

13
 7 .072 .084 5.026 7 .657 Not significant

8 -.042 .084 5.270 8 .728 Not significant

9 -.073 .084 6.038 9 .736 Not significant

10 -.125 .083 8.295 10 .600 Not significant

11 -.077 .083 9.147 11 .608 Not significant

12 -.065 .083 9.774 12 .636 Not significant

Table K. Box-Pierce statistic

0.1452 0.021025

-0.0332 -0.001089

0.0482 0.002304

s0.0842 0.007056

0.0002 0

0.0222 0.000484

0.0722 0.005184

-0.0422 -0.001764

-0.0732 -0.005329

-0.1252 -0.015625

-0.0772 -0.005929

-0.0652 -0.004225

∑ =0.002092

Q=0.002092× 132
Q=0.2761
Box-pierce statistic~𝜒∝2 , m
∝= 0.05
2
Bp~𝜒0.05 , 12=21.026
Bp> 𝜒∝2 , m

The Box-Ljung statistics from the Autocorrelation test shows that all the lags are not significant. Results of the Box-Pierce Q statistic
shows that the overall significance of the Autocorrelation test is poor since the calculated value of the Box-pierce Q is less than the

14
tabulated value. Hence, we reject the null hypothesis. In other words, it is reasonable to conclude that at 95% confidence level, the changes
in prices of stocks traded in Ghanaian Stock market are independent.

Table L. Runs test

VAR00001

Test value 4721.8402

Cases< Test value 51

Cases>= Test value 81

Total Cases 132

Number of runs 5

Z -10.801

[Link].(2-tailed) .000

Table 4.12 shows the calculated value of the Z-statistic is -10.801 with an associated asymptotic significance (2-tailed probability of
0.000). Consequently, the null hypothesis that the stock price changes are random is rejected at the 1% level. Thus, at the 99% confidence
level, the stock price movement in the Ghanaian market is not random. This result is consistent with Magnusson and Wydick (2002). They
made use of Partial Autocorrelation and runs test for randomness for a number of African markets. They find evidence of significant
correlations in stock returns for Ghana, Nigeria and Zimbabwe, thus suggesting that these markets are not efficient, even at weak form.

DISTRIBUION PATTERNS

15
 Fig 4: Distribution
pattern

The normal curve in the above shows the distribution pattern is asymmetrical. This implies that the distribution pattern of the stock price
movement is not random. This is consistent with the result of the Runs test earlier conducted.

Table M. Result of the One-sample Kolmogorov Smirnov test

N 132

Normal Parametersᵃ,ᵇ Mean 4721.8402

Std. Deviation 2801.68066

Most Extreme Differences Absolute .158

Positive .158

Negative -.118

Kolmogorov-smirnov Z 1.814

[Link].(2-tailed) .003

One-sample Kolmogorov-Smirnov test

16
The table above shows the calculated value of the Kolmogorov-Smirnov Z is 1.814; with an associated asymptotic significant (2-tailed
probability of 0.003). Therefore, we reject the null hypothesis that there exists no observable consistent trend in the pattern of price
movement. This implies, at the 99% confidence level, that there is an observable consistent trend in the Ghanaian market.

Discussion of findings for the Ghana stock market

The Ghanaian market just like the Nigerian bourse shows that the movements of prices are not independent. This means that it is possible
for investors to use previous stock price movements to predict subsequent day’s stock prices or use today’s stock price movements to
predict future prices. Furthermore, the results of the runs test and distribution patterns of the stock price changes show that the price
movements are not random. This suggests that the Ghana stock market is not efficient in the weak form. That is, new information is not
always diffused promptly. Therefore, it is possible for investors to make gains on the basis of privileged information. This result is
consistent with Magnusson and Wydick (2002), Frimpong et al (2008), Ayentimi et al (2013) and Osei (2002).

Lastly, the one sample Kolmogorov Smirnov test for availability of trend in the pattern of stock price changes in the Ghana stock market
revealed that there is a trend in the pattern of stock price movements. This means that there are short durations of bullish runs and short
durations of price movements. However, even within these periods, the investors were not in a vantage position to predict stock prices
with absolute certainty since the changes in the stock prices are independent. The results obtained from both the Nigerian and the Ghanaian
stock markets show that they are the same in every respect as they both exhibit independence in price movements, exhibited non-
randomness as well as the presence of observable trends in the movement of prices within the period under study. This shows that one
could not really draw a line of difference between the two markets.

Moreover, we acknowledge the finance approved for publishing this article, which Landmark University, Nigeria supplied. It is our hope
that tertiary institutions in and around Nigeria will emulate and adopt the laudable gesture.

REFERENCES
1. Afego, P. (2012) Weak form efficiency of the Nigerian Stock Market: An empirical analysis. International Journal of
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Aggregates in India, an Empirical Analysis, Paper Presented in the 4th Annual Conference on Money and Finance, Mumbai.
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Information Efficiency, Romanian Journal of Economic Forecasting, 10, pp. 147-160.
10. Dragotă, V., Stoian, A. M.., Pele, D. T., Eugen, M. & Malik, B. (2009) The Development of the Capital Market, Evidences on
Information Efficiency, Romanian Journal of Economic Forecasting, 10, pp. 147-160.

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11. Ekechi, A.O. (2002) “The Behaviour of Stock Prices on the Nigerian stock exchange: Further Evidence,” First Bank Quarterly
Review, March edition.
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15. Fama, E.F. (1991) Efficient Capital Markets: II 46(5):1575-1617.
16. Frimpong, J. M. (2008).Capital market efficiency, “An analysis of weak-form efficiency on the Ghana Stock Exchange”,
Journal of Money, Investment & Banking, vol. 5, pp.5-12.
17. Inegbedion, H.E. (2009) “Efficient Market Hypothesis and the Nigerian Capital Market,” an Unpublished M Sc. Thesis written
in the Department of Business administration, University of Benin, Nigeria.
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Applied Macro and Micro Economic Modeling for European and Former Soviet transition economies. University of Leicester,
England.
19. Mlambo C., Biekpe, N. (2005) Thin-trading on African stock markets: Implications on market
efficiency testing, The Investment Analyst Journal, 61, 29-40.
20. Mollah, S. & Vitali, F. (2010) Stock Market Efficiency in Africa, Evidence from Random Walk Hypothesis, Mid-West Finance
Association Annual Meeting, West Chicago River North, March 2-5, 2011.
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Accounting, 2 (12), 38 - 46.
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11(1), 54-68.
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Finance Association Annual Meeting, West Chicago River North, March 2-5, 2011.
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to ACE Phare Project Paper P95-2014-R.

18
 Heriot-Watt University
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Efficiency of the Nigerian Capital Market: Implications for

Investment Analysis and Performance

Citation for published version:

Samuel, SE & Oka, RU 2010, 'Efficiency of the Nigerian Capital Market: Implications for Investment
Analysis and Performance', Transnational Corporations Review, vol. 2, no. 1, pp. 42-51.
[Link]

Digital Object Identifier (DOI):

10.1080/19186444.2010.11658222

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 Transnational Corporations Review Vol. 2, No. 1, 2010
[Link] info@[Link] 42-51

Efficiency of the Nigerian Capital Market:

Implications for Investment Analysis and Performance

Sunday Eneojo Samuel and Richard Uzoefuna Oka ∗

Abstract: This paper appraises the nature and efficiency of the Nigerian capital market and its
implications for investment analysis and performance. It examines the implications of the efficient-market
hypothesis and types and levels of market efficiency. Data was collected using a survey questionnaire. A
multi-stage and random sampling technique was used to select a sample including four categories of
people and firms relevant to the study. Data were analyzed using a Likert scale and descriptive statistics.
The null hypothesis was analyzed using a five-point Likert scale with a 5% error term, and the study
found that information has contributed to the efficiency of the Nigerian capital market to a great extent. It
is therefore suggested that the Nigerian Stock Exchange and the Nigeria 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 while also committing to continuous training and
retraining of their staff.

Key words: Nigerian capital market, efficient capital market, market efficiency, securities, investment

1. Introduction
Nigeria is a developing country. Its government has severally shown commitments to its socio-
economic advancement through various initiatives and policy documents. The Millennium
Development Goals (MDGs), Vision 20, 20-20, Poverty Alleviation Programme, financial sector
reforms and the Seven Point Agenda are instances of this. However, the success or failure of any
government-led development effort hinges on the soundness of its financial system. In a nutshell,
the financial market is the heartbeat of any market economy, and the capital market is the focal
point of the financial market.
According to Ologunde et al (2006), the capital market is a collection of financial institutions set up for
the granting of medium- and long-term loans. Babalola (2008) is of the opinion that the major
significance of the financial system in any economy is its ability to mobilize savings and to efficiently
intermediate in financial service delivery so as to create liquidity in the economy, minimize information
cost, and create a bridge in assets diversification. Nwankwo (2007) states that a developed local securities

∗
Sunday Eneojo Samuel and Richard Uzoefuna Oka, Department Of Accounting, Kogi State University, Anyigba, Nigeria. Tel:
+234 8059281392; +234 7063049070 E-mail: aglowsun@[Link], drruoka@[Link].

42
 Efficiency of the Nigerian Capital Market

market will stabilize the financial sector, entrench competitive spirit within the sector, and effectively
complement the banking sector.

The Nigerian capital market is a veritable instrument for promoting limitless wealth
accumulation through investment (Adepetun, 2008). However, in efficient capital markets,
information is expected to be accurate because security prices react instantaneously to new
information such that there are no opportunities for market participants to achieve abnormal
returns consistently (Hadi, 2006).

The broad objective of this study is to appraise the efficiency of the Nigerian capital market, its
implications for investment analysis and performance. Specifically, the study intends to:

(i) create a clear understanding of the nature of the Nigerian capital market;
(ii) determine the efficiency level of the Nigerian capital market;
(iii) make recommendations based on the findings.
The following null hypothesis was formulated and tested:

(i) Information has not greatly contributed to the efficiency of the Nigerian capital market.

2. Efficiency of the Nigerian capital market

2.1. An overview of the Nigerian capital market
According to Okwoli and Kpelai (2008), the capital market is the second type of financial market that
provides the facilities for long-term lending and borrowing using securities. This is the market in which
large amounts of money or capital are raised by institutions such as governments and companies for long-
term use (Drummond, 1998).

Capital market activities took place long before the establishment of actual capital markets. According to
Momoh (2008), capital market activities in Nigeria began in 1946 during the introduction of the Ten Year
Development Ordinance, through which 3.25% ₤300,000 loan stock was issued to the public in units of
₤10, with a maturity date of 10-15 years. Mfomiso (2007) states that prior to 1960, virtually all formal
savings were made through the banking sector, with only core capital investments made on behalf of
Nigeria by Britain on the London Stock Exchange.

The first ever capital market in Nigeria was the Lagos Stock Exchange, which began operation in 1961.
However, the first ever ordinary shares to be traded in Nigeria and offered to the public were those of the
Nigeria Cement Company Limited in 1959, followed by the ordinary and preference shares of John Holt
(Liverpool) Investment Company Limited and the ordinary shares of Nigeria Tobacco Company Limited
in 1960 (Areago, 1990). These activities were supervised by the London Stock Exchange (Okwoli and

43
 Sunday Eneojo Samuel and Richard Uzoefuna Oka

Kpelai, 2008). Subsequently, in 1976, the Lagos Stock Exchange was transformed into “The Nigeria
Stock Exchange” following the recommendation of Dr. Pius Okigbo’s committee (Uduehi, 2005).

The Nigerian capital market is categorized into the primary and secondary markets. The primary is the
market for fresh issues. Traded securities are offered through subscription, right issues, offer for sales, by
introduction, and by private placement (Drummond, 1998). The secondary market operates after an issue
has been completed and securities listed in the stock market (Okwoli and Kpelai, 2008). The secondary
market is made up of two exchanges: The Nigeria Stock Exchange and the Abuja Commodities Exchange
(Sanni, 2008).

2.2. Efficient-market hypothesis

According to Koijen and Nieuwerburgh (2007), the efficient-market hypothesis implies that capital
markets are efficient with regards to a set of information, thereby rationally reflecting all new information
in securities prices in terms of magnitude and direction of such movements. This means that stock prices
move with the influx of information (McMinn, 2009). Hirschey and Nofsinger (2008) state that the
efficient-market hypothesis is the situation where security prices fully reflect all available information.
That is to say, “if stock and bond markets are perfectly efficient and current prices fully reflect all
available information, then neither buyers nor sellers have an information advantage”.

2.3. Efficient capital market

Efficient capital market is the ability of securities to reflect and incorporate relevant information, almost
instantaneously, in their prices (Pandey, 2005). According to Hadi (2006), an efficient capital market is a
market that is efficient in processing information. Bruce (2008) opined that, efficient capital market is
informational efficiency, which essentially means that market prices adjust instantaneously to new
information that could inform future prices.

2.4. Types of market efficiency

There are three types of market efficiency; they are Operational efficiency, Allocation efficiency and
pricing efficiency.

2.4.1. Operational efficiency: According to Mensah (2003), operational efficiency implies that all
transactions in securities are carried out instantly, correctly, and at a low cost. This may be
promoted through enhancing competition between exchanges for secondary market transaction.

2.4.2. Allocation efficiency: This refers to mechanism which allocates scarce resources to where they
can be most productive.

2.4.3. Pricing efficiency: A market that is price efficient is one in which an investor can only expect to
earn a risk-adjusted returns from an investment as prices move instantaneous and in an unbiased

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manner to any news. A capital market is described as efficient if security prices are timely and
accurately reflects all available information about the current and future likely worth of the assets
(Adelegan, 2008).

2.5. Levels of market efficiency

Robert (1991) identifies the followings as the three levels of market efficiency: weak form, semi-strong
form and strong form.

2.5.1. Weak form efficiency: Okwoli and Kpelai (2008) defined weak form efficiency as a situation
where the security prices reflect all the past information as reported by the press. It is therefore,
not possible for an investor to predict future security price by analyzing historical prices, and
achieve a performance (return) better than the stock market index. It is so because the capital
market has no memory, and the stock market index has already incorporated past information
about the security prices in the market price (Pandey, 2005).
2.5.2. Semi-strong efficiency: This level of efficiency assumes that all publicly available information
about a given security has been accurately factored into the present price of that security (Russel
and Violet, 2002). Okwoli and Kpelai (2008) looked at semi-strong efficiency as a situation
where the security prices reflect not only past information but all other published information.
2.5.3. Strong-form efficiency: This is a situation where the security prices reflect not only public
information but all information that can be acquired by painstaking analysis of the company and
the security (Okwoli and Kpelai, 2008). According to Pandey (2005), in strong-form efficiency,
the security prices reflect all published and unpublished, public and private information.
2.6. Implications of the efficient-market hypothesis

The concept of market efficiency has a number of implications for three categories of persons. These are
the investing community, the corporate world and the regulatory authorities (Mensah, 2003).

2.6.1. For investors:

• Both technical and fundamental analyses are meaningless.

• Rationality demands that an investor hold a well-diversified portfolio.
• It is necessary for high investor networks to demand for timely release of adequate
information in order to steer the market towards semi-strong form efficiency.
2.6.2. For companies:

• Emphasize substance over form

• It is pointless to fine tune the timing of new issues
• Consider prices of own stocks as an indication of market perception of virility or a lack
of it.

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 Sunday Eneojo Samuel and Richard Uzoefuna Oka

2.6.3. For regulators

Professional accounting bodies and capital market regulations should be geared towards boosting
investors’ confidence through the prevention of insider trading; protection of investors from abuse;
minimizing systematic risk; enthronement of fairness; and enhancing market efficiency.

2.7. Methodology
A survey research method was used for the study. The instrument for data collection was the
questionnaire. Fixed response questions were put forward to the respondents as data collected from such
facilitates data analysis and estimation of the validity and reliability indices of the instrument.

A multi-stage sampling technique was used to select four categories of people and firms relevant to the
study. They are professional accountants, stock broking firms, the Nigeria Stock Exchange and
Academicians. A random sampling technique was later used to select ten staff from stock broking firm,
twenty from Nigerian Stock Exchange, fifteen from Professional Accountants and thirty from the
academia making a total sample size of seventy-five.

The analytical tools used in analyzing the data collected for the study include the descriptive statistics and
Likert Scale. The descriptive statistical tools used were frequency distribution percentages and tables. The
null hypothesis was analyzed on a five-point Likert scale measuring the extent information has
contributed to the efficiency of the Nigeria capital market.

The formula for Likert Scale is (∑FX)/N

Where ∑FX = weighted sum of frequencies and N = Total response.

The mean point of scale is (∑X)/n

Where ∑X = sum of nominal value and n= Number of response categories

The cut-off point = mean + e, Where e = error term i.e. 0.05.

2.8. Data analysis and results

Data collected via the questionnaire are analyzed bellow:

Table 1.1 below shows the frequency distribution of respondents’ view on the efficiency of the
Nigerian capital market.

Table 1.1. Efficiency of the Nigerian capital market

Responses Frequency Percentage

Yes 40 53

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No 35 47
Total 75 100

Source: Field survey, 2009.

From Table 1.1 above, 53% of the respondents said the Nigerian capital market is efficient while 47%
said it is not.

Table 1.2. below shows the frequency distribution of respondents’ view on the level of efficiency of the
Nigerian capital market.

Table 1.2. Level of efficiency of Nigerian capital market.

Level Frequency Percentage

Weak form 51 68
Semi strong form 15 20
Strong form 9 12
Total 75 100

Source: Field survey, 2009

From Table 1.2. above, 68% of the respondents are of the opinion that the level of efficient of the Nigeria
capital market is weak form, while 20% and 12% of the respondents said it is semi-strong form and strong
form respectively.

2.9. Test of hypothesis

H0: Information has not contributed to the efficiency of the Nigerian Capital Market to a great extent.

Table 1.3. below shows the calculation of figures to determine the extent information has contributed to
the efficiency of the Nigerian Capital Market using Likert-Scale.

Table 1.3. Calculation of figures using Likert Scale

Responses Frequency (F) Scale (X) FX

To a very great extent 29 5 145
To a great extent 35 4 140
Undecided 4 3 12
To no extent 7 2 14
To no extent at all 0 1 0
Total 75 15 311

Source: Field survey, 2009

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 Sunday Eneojo Samuel and Richard Uzoefuna Oka

Mean point = (∑FX)/N = 311/45 = 4.15

Mean point of scale = (∑X)/N = 15/5 = 3.00

Cut off point = Mean + e = 3.00 + 0.05 = 3.05

To determine the extent to which information has contributed to the efficiency of the Nigerian capital
market, a five-point Likert scale of rating responses was used. The mean point of the responses is 4.15
and the cut off point is 3.05. The decision rule is that where the calculated mean point is above the cut off
point, it is regarded as effective; while below, reverse is the case. The calculated mean point of 4.15 is
greater than the cut off point of 3.05. Therefore, the null hypothesis is hereby rejected. That is,
information has contributed to the efficiency of the Nigerian capital market to a great extent.

3. Conclusion
The following conclusions were reached from the findings of the study:

(i) The results of the study are consistent with the reports of Adelegan (2008) which disclosed that the
Nigerian capital market is in the weak form level of efficiency. This is premised on the following:

z Operations of the market are not transparent. 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).
z There are instances of stock overvaluation and ‘cooked’ accounting books as in the case of
Cadbury Nigeria Plc (Oluba, 2008; Ryan, 2006)
(ii) 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.

(iii) An efficient market holds profound implications for investors, companies and regulators.

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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 Efficiency of the Nigerian Capital Market

References

Adelegan, Olatundun J. 2003. Capital market efficiency and the effects of dividend announcements on share prices
in Nigeria. African Development Review, 15 (2-3): 218-36.

Adepetun, Adeyemi. 2008. Investment opportunities in capital market. The Guardian, July 23, 2008.

Anonymous. 2008. Capital market: Shortcoming investors. Nigerian Tribune, May 20, 2008.

Areago, R. B. 1990. Nigerian Stock Exchange: Genesis, organization, and operations. London, United Kingdom:
Global Investor Bookshop.

Babalola, Remi. A speech delivered at members’ evening roundtable talks held at IOD National Secretariat, Ikoyi,
Lagos, Nigeria.

Bruce Chadwick’s Blog. Types of Market Efficiency. 4 January 2008. Available from
[Link]

Drummond, G. 1998. Introduction to international capital market. Security Institute Publication: 7.

Hadi, Mahdi M. 2006. Review of capital market efficiency: Some evidence from Jordanian market. International
Research Journal of Finance and Economics 3.

Hirschey, Mark, and John R. Nofsinger. 2008. Investments: Analysis and Behavior. New York, USA: McGraw-Hill
Irwin.

Investing in Africa (weblog). Nigeria: Cadbury Nigeria’s cooked books. 20 December 2006. Available from
[Link]

Koijen, Ralph S. J., and Stijn Van Nieuwerburgh. 2007. Market efficiency and return predictability. New York,
USA: New York Univeristy Stern School of Business and NBER. Available from
[Link]

McMinn, David. Inefficient vs. efficient market hypothesis. Moon Sun Finance. 2009. Available from
[Link]

Mensah, Sam. 2003. The essentials of an efficient market and implications for investors, firms, and regulators. Paper
presented at UNECA Workshop on African Capital Markets Development, 27-29 October, in Johannesburg,
South Africa.

Mfomiso, G. A. 2007. History of Nigeria Stock Exchange. Stock Market Investment (blog archive). Available from
[Link]

Momoh. 2008. The Nigerian capital market. The Tide Online, 8 February, 2008.

Nwankwo, Abraham. 2007. Towards creating a vibrant bond market in Nigeria. Paper presented at First Annual
BusinessWorld Investment Lecture, 6 November, in Lagos, Nigeria.

Okwoli, Ambrose A., and S. T. Kpebi. 2008. Introduction to Managerial Finance. 2nd ed. Jos, Nigeria: Go-Go
International Limited.

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Ologunde, Adedoyin O., David O. Elumilade, and T. O. Asaolu. 2006. Stock market capitalization and interest rate
in Nigeria: A time series analysis. International Research Journal of Finance and Economics 4.

Oluba, Martin. 2008. The visible hand of the Nigerian Stock Exchange. The Business Day. 20 April.

Pandey, I. M. 2005. Financial Management, Ninth Edition. New Delhi:Vikas.

Roberts, Harry V. 1967. Statistical versus clinical prediction of stock market [unpublished]. Quoted in Brealey,
Richard A., and Myers, Stewart C. 2006. Principles of Corporate Finance. New York, USA: McGraw-Hill: 295.

Russel, Philip S., and Violet M. Torbey. The efficient market hypothesis on trial: A survey. Carrollton, Georgia,
USA: University of West Georgia. Available from [Link]

Sanni, Y. 2008. The Nigerian capital market: Lessons and opportunities. Available from
[Link]

Acknowledgement

A number of individuals have contributed immensely in bringing this article to its present state. We are
thankful to all of them for their criticisms, help and encouragement. Even though time and space
constraints would not permit us to list all of their names, we must specifically express our gratitude to
Professor Akpa Abimaje of Benue State University, Makurdi, Nigeria, and Dr. Ajachukwu, Mr. Rufai, Mr.
Inyanda, and Mr. Audu, all of Kogi State University, Anyigba, Nigeria.

About the Authors

Sunday Eneojo Samuel is a lecturer in the Department of Accounting at Kogi State

University in Anyigba, Nigeria, where he obtained his [Link]. in the discipline. He
received his [Link] in Accounting and Finance from Benue State University in Makurdi,
Nigeria and is a member of the Institute of Certified Public Accountants of Nigeria
(ICPAN). Mr. Samuel worked for Arewa Textile plc as finishing inspector from 1999-
2002 and also served as a Director of Special Duties for the World Changers Youth
Foundation in Kaduna, Nigeria (a Non Governmental Organization) from 2007 to 2008.

Richard Uzoefuna Oka, Ph.D., is a Senior Lecturer in the Department of Accounting at Kogi State
University in Anyigba, Nigeria. He was formerly the Head of the Department of Accounting and Dean of
the Faculty of Management Sciences at the same university. Dr. Oka’s educational history is as follows:
Associate Diploma in Education, University of Lagos, 1974; [Link]. (Hons) in Accountancy, University of

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 Efficiency of the Nigerian Capital Market

Nigeria, Enugu Campus, 1980; Post-Graduate Diploma, Business and Public Administration, Anambra
State University of Technology, Enugu, 1989; MBA in Banking and Finance, Anambra State University of
Technology, 1991; Professional Diploma in Computer Software Applications, Enugu State University of
Science and Technology, Enugu, 1992; Ph.D. in Agricultural Economics (Agricultural Financing), Enugu
State University Of Science and Technology, Enugu, 2003. He became a Certified National Accountant
(CNA) of the Association of National Accountants of Nigeria (ANAN) in 1994, a Fellow of The Institute of
Corporate Administration of Nigeria (FCAI) in 2008, and a Fellow of the Strategy Institute of Natural
Resources and Human Development (FRHD) in 2008.

Contact Information

Sunday Eneojo Samuel and Richard Uzoefuna Oka, Department Of Accounting, Kogi State University,
Anyigba, Nigeria. Tel: +234 8059281392; +234 7063049070 E-mail: aglowsun@[Link],
drruoka@[Link].

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The Efficient Market Hypothesis and Predictability of Equity

Prices/Returns in Nigeria
AGBAM, Azubuike Samuel
Department of Mathematics (Applied Statistics),
Faculty of Science, Rivers State University, Nkpolu-Oroworukwo
Port Harcourt - Nigeria
Email: [Link]@[Link]
2. [Link]@[Link]

ESSI, Isaac Didi

Department of Mathematics (Applied Statistics),
Faculty of Science, Rivers State University, Nkpolu-Oroworukwo
Port Harcourt – Nigeria,
Email: [Link]@[Link]

Dagogo, Daibi W.
Department of Finance,
Faculty of Administration and Management,
Rivers State University, Nkpolu-Oroworukwo, Port Harcourt – Nigeria
Email: [Link]@[Link]
DOI: 10.56201/ijasmt.v10.no5.2024.pg74.100
Abstract
This study examines the efficiency of The Nigeria Stock Exchange in the weak-form level and the
predictability of equity prices/returns using monthly observations. The data set covers the period
of ten years- January, 2013 to December, 2022. The stocks were randomly selected based on their
ability to trade frequently on the floor of the market, and absorb the shocks of thin trading with
irregular hiking. All time-series data were obtained from The Nigeria Stock Exchange database.
After testing for normality of the data (the returns of the companies follow normal distribution
process), Augmented Dickey-Fuller, Phillips-Perron and Kwiatkowski, Phillips, Schmidt and Shin
unit root tests were also employed (which provide evidence that the Nigeria index are
nonstationary at level). The study applied various parametric and non-parametric tools which
include BDS test, serial correlation coefficient test, runs tests and variance ratio tests. The
empirical evidence obtained from these studies are mixed. Indeed, while some studies show
empirical results that support the weak form of EMH, other evidences reject the null hypothesis.
The Brock-Dechert-Scheinkman and Ljung-Box tests suggest that the return of these companies is
not significantly auto-correlated; that successive returns cannot be predicted. The results of the
investigation based on runs test confirm evidence of randomness. The variance ratio statistic for
each of the company is associated with probability value of 0%. This suggests the rejection of the
null hypothesis of sustainable random process. Therefore, our test evidence shows that the returns
of these companies are not random; rather stationary and predictable. The policy implication of

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these analyses is that the Nigeria Stock Exchange, as an emerging market, must be closely
monitored to achieve an optimal maturity level. It is therefore recommended that policy makers to
enlighten potential investors of the opportunities that are available in the stock market. Such
enlightenment should seek to stimulate their interest in capital market activities and thus increase
the breadth and depth of the capital market.
Keyword: Efficient market hypothesis, stock return predictability, BDS test, Ljung-Box, Runn test,
Variance Ratio, The Nigeria Stock Exchange
1.1 Background to the study
The stock market is the collection of exchanges and other venues where the buying, selling, and
issuance of shares of publicly held companies take place (Afolabi, 1998). The shares, also known
as equities, are fractional ownership in a company (Olowe, 1996; Levinson, 2006; Alfred, 2007;
Bhalla, 2012).
Academic research suggest that share prices follow a random walk. That is, successive price
changes (one-period returns) are independent of each other (Fama, 1970; Brealey and Myers,
2003). The search for an explanation of this apparent randomness led to the formation of Efficient
Market Hypothesis (EMH) (Adams et al. 2003).

3. Private Information

Strong

2. Public Information
Semi-Strong

1. Past Prices
WEAK

Figure 1.1: Basic Forms of Market Efficiency.

The three versions of efficient market hypothesis are varying degrees of the same basic
theory.

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A Stock market is said to be efficient if security (share) prices at any time “fully reflect” all
available, relevant information (Fama, 1970, 1991); reflect information to the point where the
marginal benefits would not exceed marginal costs (Jensen, 1978; Fama, 1991); and it will be
impossible for an investor to beat the market (Fama, 1970, 1991). A precondition for this strong
version is that the benefits of acting on the information equals the cost of collecting it, always 0
(Grossman and Stiglitz, 1980; Adams et al. 2003).
The Efficient Market Hypothesis deals with informational efficiency, which is a measure of how
quickly and accurately the market digests information (Strong, 2006). Eugene Fama developed the
idea of efficient market hypothesis as an academic concept of study; and classified it into three
versions according to the levels of information (see fig. 1.1), namely: weak-form (How well do
past returns predict future returns?); semi-strong form (How quickly do share prices reflect public
information announcements?); and strong-form efficiencies (Do any investors have private
information that is not fully reflected in the market prices?) (Fama, 1970; 1991; Roberts, 1959).
As we move from weak-form to strong-form we are referring to progressively more information.
Efficient market is a market which “adjust rapidly to new information” (Fama et al, 1969).
In an efficient capital market, there should not exist a significant correlation between the share
prices over time (Brealey, 1969).
1.2 Motivation
Main-stream finance theory has traditionally held that markets cannot be beaten under the
assumption that modern financial markets are efficient (e.g. Roberts, 1959; Fama, 1965;
Samuelson, 1965). The efficient market hypothesis (EMH) demonstrates that knowledge of past
security prices would not necessarily lead to high profits. Any information that could be used to
predict stock performance is already reflected in the stock price today (Dremen, 1991). Because
of the wide availability of public information, it is nearly impossible for an investor to beat the
market systematically (Cowles, 1933,1934, 1960; Roberts, 1959; Fama, 1965; Samuelson, 1965
Fama, 1970, 1991).
This theory is, however, described notationally as follows:
𝐸(𝑝̅𝑗, 𝑡+1 |Ω𝑡 ) = [1 + 𝐸(𝑟̅𝑡, 𝑡+1 |Ω𝑡 )]𝑝𝑗,𝑡 (1.1)
Where:
𝐸 = expected value operator
𝑃𝑗, 𝑡+1 = price of security 𝑗 at time 𝑡 + 1 (with reinvestment of any intermediate cash income from
the security)
𝑟𝑗 ,𝑡+1 = return on security 𝑗 during period 𝑡 + 1(one period percentage return: (𝑃𝑡+1 − 𝑃𝑗, 𝑡 )/ 𝑃𝑗, 𝑡
Ω𝑡 = a general symbol for whatever set of information is assumed to be “fully reflected” in the
price at t
𝑃𝑗, 𝑡 = denotes the price of asset j at time t
The “fair game” models rule out the possibility of trading systems that have expected profits or
expected return in excess of equilibrium. Thus, let

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𝑥𝑗, 𝑡+1 = 𝑝𝑗, 𝑡+1 − 𝐸(𝑝𝑗, 𝑡+1 |Ω𝑡 ) (1.2)

𝑥𝑗, 𝑡+1 = the excess market value of security 𝑗 at time 𝑡 + 1 (i.e. difference between the observed
price and expected value of the price at 𝑡 based on the information Ω𝑡 ).
In an efficient market, it must be true that:
𝐸(𝑥̅𝑗, 𝑡+1 |Ω𝑡 ) = 0 (1.3)
which, by definition, says that the sequence (𝑋𝑗, 𝑡 ) is a “fair game” with respect to the information
sequence (𝛺𝑡 ) [Samuelson (1965); Mandelbrot (1966)].
Equivalently, let
𝑧𝑗, 𝑡+1 = 𝑟𝑗, 𝑡+1 − 𝐸(𝑟̅𝑡, 𝑡+1 |Ω𝑡 ) (1.4)
then
𝐸(𝑧̅𝑡, 𝑡+1 |Ω𝑡 ) = 0 (1.5)
so that the sequence of (𝑧𝑗,𝑡 ) is also a “fair game” with respect to the information sequence (𝛺).
Does this theory/model provide a reasonably accurate description of reality?
This study therefore, sought to:
i. ascertain whether the Nigeria Stock Markets are not efficient at the weak-form; and
ii. most importantly, extend the test by examining the predictability of equity
prices/returns.
The only way to prove the informational efficiency for a given stock market is to carry out a
number of tests. If it is deemed statistically appropriate that historic share prices have predictive
power, the efficient market hypothesis will be rejected.
1.3 The aim and objectives of the study
The aim of the study is to examine, model and explain the behavioural patterns of equity
prices/returns in Nigeria stock markets; and to test whether The Nigeria Stock Exchange have not
evolved into some efficiency. To achieve this aim, the following specific objectives are considered:
The specific objectives considered are as follows:
i. To examine the non-linear dynamically independent relationship (behavioural patterns) of
equity prices/returns in Nigeria stock markets.
ii. To evaluate the sequence of randomness of equity prices/returns in Nigeria stock markets.
iii. To examine the significance of serial correlation associated with the lag for a given security.
iv. To ascertain the unpredictability of equity prices/returns over time.
1.4 Scope of the Study
i. This study considers only one form of market efficiency, i.e. the weak-form, where the
information set which an efficient market is considered to fully reflect includes only
historical prices.
ii. Further, It is restricted to ten (10) quoted companies whose stocks prices/returns are
publicly available over the study period; and the companies are selected from the eight
(8) sectors that make up the Nigerian Stock Exchange.

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iii. The empirical enquiry covers the period 2013 – 2022 (ten years).
1.5 Significance of the Study
The outcome of the tests of the EMH are important in assessing public policy issues such as the
desirability of merger and takeover, short-termism and regulation of financial institutions.
i. Government: If the efficient Market Hypothesis is valid, then, its consistency with the
Nigerian Capital Market will have policy implications and thus, this study will be a
reference point for government policies on capital market growth and efficiency.
ii. Participants: This study will also afford participants in the capital market, such as
investors, stockbrokers, registrars, solicitors, and underwriters the opportunity of having
access to useful data on the consistency of the Nigerian Capital Market with efficient
market hypothesis. Such data will be useful as a predictive tool in achieving their
objectives.
iii. Academia and Practitioners: The academia and practitioners will be acquainted with
empirical data on the validity of efficient market hypothesis in the Nigerian capital market.
This will trigger researches that may seek to test or validate the results of this study.
iv. Lastly, the results of this study will constitute data that will be useful to researchers as well
as students of Finance, Business Administration and allied disciplines in the management
Sciences.
1.6 Limitations of the Study
The Nigerian economy is one that has witnessed general price increases over time due to inflation.
It is therefore, difficult to distinguish between the regular movement of stock prices and those
induced by inflation, especially inflation occasioned by incessant fuel price increases. Such
movements of stock prices induced by inflation constitute a limitation on the inference from this
study.

2.1 Conceptual Review

2.1.1 Overview of Nigerian Capital Market
The Nigerian Capital Market is a channel of mobilizing long-term funds by providing mechanism
for private and public savings through financial instruments (equities, debentures, bonds and
stocks) with major components consisting of the Security and Exchange Commission (SEC) and
the Nigerian Stock Exchange (NSE). Founded in 1960, the NSE is the second largest market in
sub-Saharan Africa with fully automated exchange that provides the listing and trading services as
well as electronic Clearing, Settlement and Delivery (CSD) services through Central Securities
Clearing System (CSCS). The exchange keeps on evolving as a competitive market and meeting
the needs of investors. It operates fair, orderly and transparent markets with over 200 listed equities
and 258 listed securities, and had attracted the best of African enterprises as well as the local and
global investors (NSE, 2013). The market has become an integral part of the global economy such
that any shock in the market has contagious consequences. Moreover, the Nigeria’s capital market
has enjoyed a decade of unprecedented growth. The market capitalization increased by over 90.0%

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from 2003 to 2008. However, from a peak in March 2008, the market capitalization went declined
spirally by about 46% in 2009 (SEC Report, 2009).
The Nigerian capital market is an integral part of the Nigerian financial system. Other sectors of
the Nigerian financial system include: the money market, the insurance market and the pensions.
Each of these markets has a statutory regulatory institution namely: CBN, SEC, NAICOM and
PENCOM for the money, capital, insurance and pension markets respectively. These regulatory
institutions are empowered by statutes (laws) to supervise the various markets and facilitate the
exchange of funds between the surplus and deficit units.
The Nigerian Stock Exchange (“The Exchange” or “NSE”) operates fully electronic marketplaces
for Equities, Bonds, Exchange Traded Products, with plans to include Derivatives trading shortly.
The NSE operates an Automated Trading System (ATS) platform with a central order book which
allows Dealing Members to participate on equal terms, competing on the hierarchical basis of
Price, Cross and Time priority. The Exchange runs a hybrid market, allowing Dealing Members
to submit orders and Market Makers to submit two-sided quotes into the order book (NSE, 2019).
The convergence of global economy makes all countries and all markets sensible to the happenings
in other countries. The 2008 global financial meltdown originated from the United States of
America (USA) had varying degree of impacts on different capital markets in various countries.
This situation is compounded with the continuous volatility in the global oil price which in theory
adversely and significantly affecting capital markets (Njiforti, 2015; Asaolu and Ilo, 2016). Nigeria
recently experienced economic recession as a consequence of the 2014-2016 global oil price
downturn. In view of these, the various SEC reports came with several recommendations to
reposition the Market as a world class institution. The main recommendations are; the development
of an enforcement framework to prevent market manipulation, and the establishment of principles
for risk management for capital market operators.

2.1.2 The Concept of Efficient Market Hypothesis

The concept of Efficient Market Hypothesis stipulates that in a free market, that stock prices
already fully reflected all available information, and securities are fairly priced (Samuelson, 1965;
Fama, 1965, 1970, 1991). Considering the information reflected in the markets, market efficiency
is broken down into three levels. The three versions of the efficient market hypothesis are varying
degrees of the same basic theory (see figures. 2.1 and 2.2).
Let 𝛼(Ω𝑡 ) = [𝛼1 (Ω𝑡 ), 𝛼2 (Ω𝑡 ), . . . , 𝛼𝑛 (Ω𝑡 )]
be any trading system based on Ω𝑡 which tells the investor the amounts 𝛼𝑗 (Ω𝑡 ) of funds available
at time t that are to be invested in each of the n available securities.
The total excess market value at 𝑡 + 1 that will be generated by such a system is:
𝑛

𝑉𝑡+1 = ∑ 𝛼𝑗 (Ω𝑡 )[𝑟𝑗, 𝑡+1 − 𝐸(𝑟𝑗, 𝑡+1|Ω𝑡 )],

𝑗=1
which, from the “fair game” property of (1.5) has expectation,

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𝐸(𝑉𝑡+1 |Ω𝑡 ) = ∑ 𝛼𝑗 (Ω𝑡 )𝐸(𝑍𝑗, 𝑡+1 |Ω𝑡 ) = 0

𝑗=1

Prices fully reflect all available relevant information

1. Weak form 2. Semi-strong form 3. Strong form
Prices fully reflect Prices fully reflect all Prices fully reflect all
past prices publicly available available information
information (private and public)

Fig. 2.1: Information and Levels of Market Efficiency

As we move from weak-form to strong-form we are referring to progressively more
information.

The Figure 2.1 illustrates these three forms of efficiency. It should be noted that moving from
weak to semi-strong to strong form efficiency, the set of information expands. Thus, if markets are
strong-form efficient, then they are also semi-strong and weak form efficient. Similarly, if markets
are semi-strong form efficient, then they are also weak form efficient.
For one thing, not everyone has access to the same news, nor does everyone receive the news in a
timely fashion. Because of this discrepancy, market participants commonly talk about three forms
of the EMH, each of which is based on the availability of a different level of information (Strong,
2004). Copeland and Weston (1983) pointed out that the notion of efficient capital markets
depends on the precise definition of information and the value of information. And an information
structure may be defined as a message about various events which may happen.

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2.1.3 Market price and Available information

At one level, capital markets are places where companies who need long-term finance can meet
investors who have finance to offer. This finance may be equity finance, including issue of new
ordinary shares, or it may be debt finance, in which case companies can choose from a wide range
of loans and debt securities.
At another level, capital markets are places where investors buy and sell company and government
securities, with their trading decisions reflecting information on company performance, insight
provided by financial analysts, dividend announcements by companies, expectations on the future
levels of interest rates and inflation, the investment decisions of finance managers, etc.
At both levels, companies and investors will want the capital markets to assign fair price to the
financial securities being traded. In the language of corporate finance, companies and investors
want the capital market to be efficient. It is possible to describe the characteristics of an efficient
capital market by considering the relationship between market prices and the information available
to the market.
Investors, finance managers and capital markets obtain a great deal of information about
companies from their financial statements, from financial databases, from the financial press, etc.
Through the application of ratio analysis, financial statements can be made to yield useful
information concerning the predictability, solvency, performance, efficiency of operations and risk
of individual companies (Watson and Head, 1998).
This information will be used, for example, by investors when reaching decisions about whether,
and at what price, or offer finance to companies; by financial managers in making decisions in the
key areas of investment, financing, and dividends; by shareholders making decisions on which
securities to add or removed from their portfolios; and reference point for government policies on
capital market growth and efficiency.
2.1.4 Price Movements in the Capital Market
The security prices have been observed to move randomly and unpredictably (Olowe, 1996), but
what remained to be shown was why share price followed a random walk. There is therefore, the
need for a model of share price behavior to explain the random walk. This need has been met in a
general model based on the efficiency of the markets in which shares are traded. This model is
known as the efficient market hypothesis (EMH) (Pandey, 2015; Kishore, 2004).
The price of an equity stock is a stochastic variable, i.e. it is a random variable whose value changes
over time. It is usually assumed that the stock has an expected financial return which is exponential,
but superimposed on this is a random fluctuation. This may be expressed mathematically as
follows:
𝑆𝑡 = 𝑆0 𝑒 𝜇𝑡 + 𝑅𝑉, (2.1)
where 𝑆0 and 𝑆𝑡 are the stock price now and at time 𝑡, 𝜇 is the return on the stock and 𝑅𝑉 is a
random variable. It is further assumed that the fluctuations, which cause the stock price to deviate
from its smooth part, are equally likely to be upwards or downwards: we assume the expected
value
𝐸[𝑅𝑉] = 0. (2.2)
It follows that

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𝐸[𝑆𝑡 ] = 𝑆0 𝑒 𝜇𝑡 . (2.3)

An efficient capital market is one in which prices of traded securities fully reflect all publicly
available information concerning those securities. This implies that when security prices reflect all
available public information about the economy, about the financial markets and about the
company involved then an efficient market is in existence (Van Horne, 2002). Thus, in an efficient
market security prices adjust instantaneously and in an unbiased manner to any piece of new
information released to the market. As a result, security prices are said to fluctuate randomly about
their “intrinsic” value. New information can result in change in the “intrinsic” value of a security
but subsequent security price movement will follow what is known as a random walk (i.e. changes
in price will not follow any pattern (Van Home and Dhamija, 2012; Ross et al, 1996). Efficiency
and randomness imply that there should be no systematic correlation between the price movement
on one day and that of another (Fama, 1970, 1991; McLaney, 2000).
But new information, by definition, cannot be predicted ahead of time; otherwise, it would not be
new information. Therefore, price changes cannot be predicted ahead of time. The series of price
changes must be random (Brealey, Myers, and Marcus 2007). This randomness may be interpreted
to imply that investors in the capital markets take a quick cognizance of all information relating to
security prices and that security prices quickly adjust to such information. Thus, if the market is
efficient, it uses all information available to it in setting a price.
Therefore, the efficiency of security prices depends on the speed of price adjustment to any
available information; the more the speed of adjustment the more efficient the prices. The capital
market efficiency may therefore be defined as the ability of securities to reflect and incorporate all
relevant information in their prices. If capital markets are efficient, then the current share price of
a company is “fair”. There is no question of the share price being under or over-valued. The
phenomenon of under or over-valuation of securities is possible only in an inefficient capital
market (Pandey, 2015). According to Omolehinwa (1991) and Block and Hirt (1998), there are
several concepts of market efficiency and there are many degrees of efficiency depending on which
market we are talking about. Markets in general are efficient when:
(i) The price of securities bought and sold reflects all the “relevant” information that
is available and therefore known to the buyers and sellers.
(ii) No investor will consistently be able to obtain above normal returns since
security prices will correspondingly incorporate all the available information.
(iii) No individual dominates the market.
(iv) Transaction costs of buying and selling are not so high as to significantly
discourage trading.
Consequently, the above shows the benchmark against which the capital market can be evaluated
so as to determine its efficiency or otherwise. The efficiency of the stock market has often
generated controversy among analysts based on their study of developed and emerging markets.
Some say, it is efficient in the weak form, some others say it is efficient in the semi-strong form
while others say it is efficient in the strong form. The determination of overall growth of an
economy depends on how efficiently the stock market performs its allocation, operational and
pricing roles. As the stock market channel scarce savings from savers to productive investments,
the funds must be transferred at a minimum cost and in a way that benefits market operators.
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2.2 Theoretical Review

2.2.1The Capital Market Theories
Capital market theories are concerned with explaining and predicting the relationship between
expected return and risk on investments in capital market (Markowitz, 1952, 1959; Treynor, 1961,
1962; Sharpe, 1964; Lintner, 1965; Mossin, 1966; Fama,1963, 1965a, 1965b, 1970, 1991;
Samuelson, 1965; Fama and Blume, 1966; Fama, Fisher, Jensen, and Roll, 1969;; Jensen, 1978).
2.2.2 Competing Theories
The two competing theories in the financial world are:
i. Efficient Market Hypothesis (EMH)
The EMH in capital markets implies that the current market prices of stocks fully reflect
fundamental information about companies (Fama, 1970, 1991). Since there are normally positive
information and trading costs, however, a more practical definition is that share prices fully reflect
all available information to the point where the benefits of acting on the information equals the
cost of collecting it, always 0 (Jensen (1978); Grossman and Stiglitz (1980); Adams et al (2003).

𝐸(𝑋𝑗, 𝑡+1 |Ω𝑡 ) = 0 (2.4)

Generally, the essence of an efficient market is built on the two pillars:
a. In efficient markets, available information is already incorporated in stock prices.
b. In efficient markets, investors cannot beat the market – earn a risk-weighted excess
return.
The fair game for investors is an outcome of a market being efficient. If a market is efficient, then
investing is a fair game.
If 𝜴𝒕 is defined to be a particular set of information concerning security j available at time t, then
any abnormal or excess return achieved at time t+1 on security j can be written 𝜀𝑗, 𝑡+1 ,
where
𝜀𝑗, 𝑡+1 = 𝑟𝑗, 𝑡+1 − [𝐸(𝑟𝑗, 𝑡+1 )/𝛺𝑡 )]. (2.5)
The equation (2.5) shows that the excess return will be the difference between the return actually
achieved and the return expected given the risk. The EMH states that the stock market responds
immediately to all available information. An individual investor cannot therefore, in the long-run
expect greater than average returns from a diversified portfolio of shares (Davies et al, 2008). The
EMH does not say that investors will never beat the market and will never make large profits. In
other words, 𝜀𝑗, 𝑡+1 can be large and positive. What it does say is that, on average, over a period of
time, investing is a fair game. You win some, you loose some. Being an occasional winner is not
what is important (Tyson, 2003; Jordan and Miller, 2009). So, the 𝜺𝒋, 𝒕+𝟏 will sometimes be positive
and sometimes negative, with the result that the sum of the excess returns over a number of periods
of times will be average zero:
𝑛=1

∑ 𝜀𝑗, 𝑡+1 = 0 (2.6)

𝑡=1

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The EMH and the Central Assumptions

Three familiar economic theories arose between the 1950s and the early 1970s: The Capital Asset
Pricing Model (Sharpe, 1964), the Modigliani- Miller Irrelevance Propositions (Modigliani and
Miller, 1958), and the EMH (Fama, 1970, 1991). According to Gilson and Kraakman (2003), the
three theories share a common methodology and are based on an extensive set of perfect markets
assumptions which Gilson and Kraakman have distilled to the following key assumptions: rational
investors, perfect information and no transaction costs.
The fundamental role of the capital markets is to efficiently allocate capital. In an ideal market,
prices will reflect fundamental values such that resources are allocated to those willing to pay a
certain price to obtain a stock of a certain value. It follows that a market will be efficient if prices
fully reflect available information (Fama, 1970).

Perfect Market

Efficient Market Hypothesis

Random Walk

Weak Semi-strong Strong

Fair game

Fig 2.2: Models of share price behavior

The EMH was developed as a theory to explain why changes in security prices appear to be
random; meaning that it is not possible to predict future changes in security prices based on
historical price movements (Cunningham, 1994). The EMH attempts to explain this ‘random walk
model’ by purporting that the price of a particular security changes in response to information
about that security (Cunningham, 1994). This central thesis of the EMH is intuitive and as William
Sharpe commented, ‘simply put, the thesis is this: that in a well-functioning securities market, the
prices of securities will reflect predictions based on all relevant and available information. This
seems to be trivially self-evident to most professional economists – so much so, that testing seems
almost silly’ (Gilson and Kraakman, 2003).

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Formal Definition of the Value of Information

The notion of efficient capital markets depends on the precise definition of information and the
value of information (Copeland and Weston, 1983). An information structure may be defined as a
message about various events which may happen. This massage may have various values to
different people depending on:
a. Whether or not any actions can be taken based on the massage and,
b. What net benefits (gain in utility) will result from their actions.
A formal expression of the above concept defines the value of an information structure, 𝑉(Ω), as:
𝑉(Ω) = ∑𝑚 𝑞(𝑚) MAX ∑𝑒 𝑝(𝑒|𝑚)𝑈(𝛼, 𝑒) , (2.7)
𝛼

Where
𝑞(𝑚) = the marginal probability of receiving a message 𝑚,
𝑝(𝑒|𝑚) = the conditional probability of an event 𝑒 given a message 𝑚,
𝑈(𝛼, 𝑒) = the utility resulting from an action 𝛼 if an event 𝑒 occurs. This shall be called a benefit
function.

According to equation (2.7) a decision maker will evaluate an information structure (which, for
the sake of generality, is defined as a set of messages) by choosing an action which will maximize
his or her expected utility given the arrival of a message. For each possible message one can
determine the optimal action. Mathematically, this is the solution to the problem:
MAX ∑𝑒 𝑝(𝑒|𝑚)𝑈(𝛼, 𝑒) , (2.8)
𝛼

Finally, by weighting the expected utility of each optimal action (in response to all possible
messages) by the probability, 𝑞(𝑚) of receiving the message which gives rise to the action, the
decision maker knows the expected utility of the entire set of the messages, which is called the
expected utility (or utility value) of an information set, 𝑉(Ω).
ii. Random Walk Theory (RWT)
A random walk is defined by the fact that successive price changes (one-period returns) are
independent of each other; and identically distributed (Fama, 1970,1991; Brealey et al, 2005). The
random walk theory suggests that share price movements are independent of each other and that
today’s share price cannot be used to predict tomorrow’s share price. Therefore, the movement of
a share price follows no predictable pattern, but moves in a random fashion with no discernable
trend (Davies et al 2008). Formally the model says:
𝑓(𝑟𝑗, 𝑡+1 |𝛺𝑡 ) = 𝑓(𝑟𝑗, 𝑡+1 ) (2.9)
Prices will only follow a random walk if price changes are independent, identically distributed;
and even then, we should say “random walk with drift” since expected price changes can be non-
zero.
𝑃𝑡 = 𝜇 + 𝑝𝑡−1 + 𝜖𝑡 (2.10)

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Ko and Lee (1991) argue that, “If the random walk hypothesis holds, the weak-form of the efficient
market hypothesis must hold, but not vice versa. Thus, evidence supporting the random walk
model is the evidence of market efficiency. But the violation of the random walk model need not
be evidence of market inefficiency in the weak-form.

2.3 Empirical Review

The question of whether stock market returns contain a predictable component has attracted much
attention from both academics and market participants. As a result, numerous financial and
macroeconomic variables have been employed to address the issue. Studies have been devoted to
the testing of the Weak-Form Efficiency in the Nigeria capital market.
Some of the recent studies include: Sunday & Olulu-Briggs (2021); Andabai, (2019); Nageri and
Abdulkadri (2019); Okotori and Ayunku (2019); Onwukwe and Ali (2018); Ajekwe et al (2017);
Ogbulu, (2016); Ikeora, Charles-Anyaogu and Andabai (2016) etc.
3. Methodology
3.1 Population and Sample Size
i) Population
The population of this study comprises all the stocks that made up the eight (8) sectors of The
Nigerian Stock Exchange market, and they include the following:
(a) Financials: The financial sector includes Banks, Investment funds, Insurance
companies, among others (b) Basic Materials - The utilities sector consists of electric, gas
and water companies as well as integrated providers (c) Consumer Goods (d) Consumer
Services (e) Energy (Oil & Gas) (f) Healthcare (g) Industrials (h) Technology
ii) Sample Size
The sample size is ten (10) stocks.
The ten (10) stocks include: Dangote cement, Dangote sugar, Guinness, J. Berger, Neimeth,
Okomu Oil, PZ, UPDC, Vita form, and Zenith Bank.

iii) Sources of Data Collection

Data were collected from ten (10) stocks listed on the Nigerian Stock Exchange; monthly stock
price data were obtained from the exchange database over the ten (10) years trading period. The
start date is January 2, 2013 to December 31, 2022.

3.2 Sample Design

The study employs monthly raw stock prices of ten (10) companies, continuously traded in the
Nigerian Stock Exchange (NSE). The age of the stocks on the floor of the Nigerian Stock Exchange
was also considered. Consequently, only those stocks that were listed before January 1, 2010 were
considered.

3.3 Background to the Study Area

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The weak form of EMH states that Securities prices are essentially random and there is no chance
of speculation in the stock market based on the assumption that successive price changes are
independent of each other and follow a random walk. In other words, it means no individual can
make abnormal profit from trading in securities.
The myths that the market is efficient and therefore cannot be outperformed can only be debunked
statistically by employing some models/tests.
The study utilized the following statistical procedures/models:
i. Test for normality of distribution of prices of selected stock prices.
ii. Stationarity: unit root tests.
iii. The BDS non-linear model: to test for independence of successive stock prices, IID.
iv. Serial correlation / Ljung-Box test: for significant correlation (autocorrelation).
v. Runs test, to examine whether a sequence of data is not occurring randomly from a
specific distribution.
vi. Variance ratio test, to examine/compare the variances of increments.

The most convincing test of the efficient market hypothesis is when it is proven that the
professional investors can outperform the market as a whole.

i) Modeling the Behavioural Patterns of Equity Prices/Returns

This study used monthly market returns as individual time series variables.
𝑃𝐸 −𝑃𝐵
𝑅= (3.1)
𝑃𝐵
Where:
𝑅 = Return or price
𝑃𝐵 = Return or Price at the beginning of the month
𝑃𝐸 = Return or Price at the end of the month
𝑟 −𝑟𝑗, 𝑡
(𝑃𝑗,𝑡+1 − 𝑃𝑗, 𝑡 )/ 𝑃𝑗, 𝑡 = 𝑅j = 𝑗, 𝑡+1 (3.1a)
𝑟 𝑗, 𝑡
Where:
𝑅j = return or price of security j
𝑟𝑗, 𝑡+1 = Ending return or price of security j
𝑟𝑗, 𝑡 = Beginning return or price of security j

Monthly returns is proxied by the log difference change in all share indices of the NSE (The key
assumption underpinning the use of logarithm is that stock returns are not only log-normal, but are
traded on a continuous basis) and are computed as:
𝑃
𝑅𝑚 = 𝐼𝑛 ( 𝑡⁄𝑃 ) (3.1b)
𝑡−1
Where:
𝑅𝑚 = Monthly returns for All Share Index for period
𝑃𝑡 = All Share Index for month t

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𝑃𝑡−1 = All Share Index for month t-1

𝐼𝑛 = Natural Logarithm

3.4 Normality Test:

It is usually assumed that population of data from which a sample or samples are drawn is normally
distributed (Gupta, 2011). A graphical test for normality is conducted using Q-Q plot. If the
underlying distribution of the data is normal, the points will fall along a straight line.
3.5 Stationarity/ Unit Root Tests:
Stationarity is a phenomenon when there is no systematic difference over time in mean and
variance in the time series. Unit root tests are commonly employed to examine the stationary
property of a time series data, e.g. financial time series: stock prices, exchange rate, etc.
The following unit root tests are investigated:
i. Augmented Dickey-Fuller (ADF) test,
ii. Phillip-Perron (P-P) test, and
iii. The Kwiakowski, Phillips, Schmidt and Shin (KPSS) test.
While ADF and P-P have the null hypothesis of stationary, KPSS has the null of nonstationary.
And the idea behind the test is that in a nonstationary series, the value of the series today does not
help you predict the value of the series tomorrow, while the opposite is true for the stationary
series.
3.6 Testing for Independence
Model Specification
Test for Non-Linear Dynamically Independent Relationship
One of the specific objectives of this study is to test the assumption that a non-linear dynamically
independent relationship exists to a considerable extent in the Nigerian stock market; making the
predictability of the selected stocks impossible. We propose the BDS test to examine the existence
of this characteristic. Brock, Dechert and Scheinkman (1996) developed a non-parametric test that
is commonly called the BDS test.
The BDS test is based on integral correlation originally introduced by Grassberger and Procaccia
(1983) as a measure of spatial correlation for n-dimensional space.
i. BDS Test
𝐶𝑚 (𝜀, 𝑇)−[𝐶1 (𝜀)]𝑚
BDS is defined as: 𝐵𝐷𝑆 = (3.2)
𝜎𝑚 (𝜀, 𝑇)/√𝑇

Where 𝜎𝑚 (𝜀, 𝑇)/√𝑇 is the standard deviation of the difference between the two correlation
measures 𝐶𝑚 (𝜀, 𝑇) and [𝐶1 (𝜀)]𝑚
Under the null hypothesis of IID, 𝐶𝑚 (𝜀)𝑚 = 𝐶1 (𝜀)𝑚 .
If the null hypothesis of IID is violated,𝐶𝑚 (𝜀)𝑚 > 𝐶1 (𝜀)𝑚 .

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When 𝜀 is serially correlated, tomorrow’s price depends upon today’s price and is therefore (partly)
forecastable from the information available today.

Testing for Independence

Another assumption of the weak-form efficiency is that, in an efficient capital market, there should
not exist a significant correlation between the share prices over time.
ii. Ljung-Box Test
The 𝑄 − 𝑆𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐 is a useful diagnostic instrument to test this hypothesis, as presented Box and
Pierce (1970) and later expanded by Ljung and Box (1978).
The 𝑄 is defined as:
𝑛
𝜌𝑘2
𝑄 = 𝑇(𝑇 + 2) ∑ (3.3)
𝑇−1
𝑘=1
where
𝑇 = the number of observations in the series;
𝑛 = the total number of lags being tested
𝜌𝑘 = the autocorrelation of the series at lag 𝑘

This test is used to pick up any departure from zero autocorrelation in either direction at all lags
(Bhattarai and Margariti, 2018). The null hypothesis suggests that the time series is independent.
In general, the lag𝑘 sample autocorrelation of 𝒓𝒕 is defined as:
∑𝑇𝑡=𝑘+1(𝑟𝑡 − 𝑟̅ )(𝑟𝑡−𝑘 − 𝑟̅ )
𝜌̂𝑘 = , 0≤𝑘 <𝑇−1
∑𝑇𝑡=1(𝑟𝑡 − 𝑟̅ )2
and the ACF is estimated by the sample autocorrelation function (or sample ACF)
𝐶𝑘
𝑟𝑘 = 𝜌̂𝑘 = , 𝑘 = 0, 1, . . . . , 𝑘
𝐶0
Test for Randomness
iii. Runs Test
It is sometimes useful to test the likelihood that a series of price movements occurred by chance.
This can be done with a handy nonparametric statistical technique called a run test.
A run test is a statistical procedure that examines whether a sequence of data is occurring
randomly from a specific distribution (Bujang and Sapri, 2018; Simon and Laryea, 2004;
Dickinson and Muragu, 1994). A runs test measures the likelihood that a series of two variables is
a random occurrence (Strong, 2006).
Run: A run is an uninterrupted sequence of the same observation (Strong, 2004). If there are too
many runs, it would mean that the residuals change signs frequently, thus indicating negative serial
correlation. Similarly, if there are too few runs, they may suggest positive autocorrelation.
• Test Statistics:
𝑟−𝜇𝑟
𝑍= (3.4)
𝜎𝑟

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Where:
𝑟 = the number of runs
𝜇𝑟 = the expected number of runs; and
𝜎𝑟 = the standard deviation
𝑍 = standard normal variable*

*The standard normal variable comes from a normal distribution with a mean of 0 and a standard
deviation of 1. Approximately 95 percent of the distribution lies within two standard distributions
of the mean. Z statistics with large absolute values do not often occur by chance.

The values of 𝜇𝑟 , 𝜎 2 𝑟 and 𝜎𝑟 are computed as follows:

2𝑛1 𝑛2
𝑢𝑟 = 𝐸(𝑅) = +1
𝑁

2𝑛1 𝑛2 (2𝑛1 𝑛2 − 𝑛1 − 𝑛2 )
𝜎2 𝑟 = ;
(𝑛1 + 𝑛2 )2 (𝑛1 + 𝑛2 − 1)

2𝑛1 𝑛2 (2𝑛1 𝑛2 − 𝑛1 − 𝑛2 )
𝜎𝑟 = √
(𝑛1 + 𝑛2 )2 (𝑛1 + 𝑛2 − 1)
iv. Variance Ratio Test
The variance ratio test compares the variances of increments of the different time intervals/lengths
to test the null of RWH against the alternate hypothesis of stationary (Campbell, et al.1997).
Hence, the VR, defined as the ratio of 1/k times the variance of the k-period return to the variance
of the one-period return, should be equal to one for all values of k.
The test is conducted by constructing an estimator for k-period variance ratio [VR(k)] statistic.
𝜎2 (𝑘)
𝑉𝑅(𝑘) = (3.5)
𝜎2 (1)

Where 𝜎 2 (1) is one-period return variance that is estimated using the one-period return 𝑆𝑡 −
𝑆𝑡−1.
𝑇−1
2 (1)
1
𝜎 = ∑(𝑆𝑡 − 𝑆𝑡−1 − 𝑟̅ )2
𝑇−1
𝑡=1
𝑇−1
2 (1)
1
⇒𝜎 = ∑ 𝑟 − 𝑟̅ )2
𝑇−1
𝑡=1
Where 𝑟̅ is the estimated average of the one-period return.
To reject the alternate hypothesis that return follows a stationary process, 𝜎 2 (𝑘) ≈ 𝜎 2 (1).
[Link]
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The study employs monthly raw stock prices/returns of ten (10) companies, continuously traded
in the Nigerian Stock Exchange (NSE) over the period January 2013 to December 2022. Monthly
time plots of the data obtained is provided in Figure 4.1 which allows for a visual interpretation of
the changes in price experienced by the Stock Exchange.
The companies were randomly selected based on their ability to trade frequently on the market and
absolve the shocks of tin trading with irregular hiking (and they include: Dangote cement, Dangote
sugar, Guinness, J. Berger, Neimeth, Okomu Oil, PZ, UPDC, Vita form, and Zenith Bank).
We were prompted to begin investigating the predictability and behavior of the selected stocks in
the year 2013. This timeline captures the year the NSE all-share index rose astronomically by 42.8
percent, thereby enforcing attraction of investments to further deepen the market. A sight view of
the trajectories of the selected company prices/returns are shown in the figures below.

DANDCEM PRICE DANDSUG PRICE GUINNES PRICE JBERGER PRICE

320 24 300 70

250 60
280 20

200 50
240 16
150 40
200 12
100 30

160 8
50 20

120 4 0 10
13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22

NEIMETH PRICE OKOMUOI PRICE PZ PRICE UPDC PRICE

2.5 250 60 20

50
2.0 200 16

40
1.5 150 12
30
1.0 100 8
20

0.5 50 4
10

0.0 0 0 0
13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22

VITAFOAM PRICE ZENITHBN PRICE

30 35

25
30

20
25
15
20
10

15
5

0 10
13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22

Figure 4.1-Prices movement of Selected Stocks over the Period Jan. 2013 to Dec. 2022.

DANDCEM RETURN DANDSUG RETURN GUINNES RETURN JBERGER RETURN

.3 .6 .6 .3

.2 .2
.4 .4

.1 .1
.2 .2
.0 .0
.0 .0
-.1 -.1

-.2 -.2
-.2 -.2

-.3 -.4 -.4 -.3

13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22

NEIMETH RETURN OKOMUOI RETURN PZ RETURN UPDC RETURN

1.0 .6 .8 .8

0.8
.4
.4 .4
0.6

0.4 .2
.0 .0
0.2 .0
0.0
-.4 -.4
-.2
-0.2

-0.4 -.4 -.8 -.8

13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22

VITAFOAM RETURN ZENITHBN RETURN

.6 .4

.4
.2

.2
.0
.0

-.2
-.2

-.4 -.4
13 14 15 16 17 18 19 20 21 22 13 14 15 16 17 18 19 20 21 22

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Figure 4.2-Increments/Returns of Selected Stocks over the Period Jan 2013 to Dec 2022

4.1 Normality Test Result

It is usually assumed that the populations from where the samples are collected are normally
distributed. A graphical test for normality was conducted using Q-Q plot (by comparing a time
series; see figure 4.3). The data points rest on the transfer lines for each case, implying that the
returns of the companies follow normal distribution process, despite that they appear noisy in
figure 4.2.

D AN D C EM R ETU R N D AN D SU G R ETU R N GU IN N ES R ETU R N JBER GER R ETU R N

.3 .4 .4 .3

.2 .2
.2 .2
Quantiles of Normal

Quantiles of Normal

Quantiles of Normal

Quantiles of Normal
.1 .1

.0 .0 .0 .0

-.1 -.1
-.2 -.2
-.2 -.2

-.3 -.4 -.4 -.3

-.3 -.2 -.1 .0 .1 .2 .3 -.4 -.2 .0 .2 .4 .6 -.4 -.2 .0 .2 .4 .6 -.3 -.2 -.1 .0 .1 .2 .3

Quantiles of DANDCEM_RETURN Quantiles of DANDSUG_RETURN Quantiles of GUINNES_RETURN Quantiles of JBERGER_RETURN

N EIMETH R ETU R N OKOMU OI R ETU R N PZ R ETU R N U PD C R ETU R N

.6 .4 .4 .6

.4 .4
.2 .2
Quantiles of Normal

Quantiles of Normal

Quantiles of Normal

Quantiles of Normal
.2 .2

.0 .0 .0 .0

-.2 -.2
-.2 -.2
-.4 -.4

-.6 -.4 -.4 -.6

-0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 -.4 -.2 .0 .2 .4 .6 -.8 -.4 .0 .4 .8 -.8 -.4 .0 .4 .8

Quantiles of NEIMETH_RET URN Quantiles of OKOMUOI_RETURN Quantiles of PZ_RETURN Quantiles of UPDC_RETURN

VITAF OAM R ETU R N Z EN ITH BN R ETU R N

.4 .3

.2
.2
Quantiles of Normal

Quantiles of Normal

.1

.0 .0

-.1
-.2
-.2

-.4 -.3
-.4 -.2 .0 .2 .4 .6 -.4 -.2 .0 .2 .4

Quantiles of VITAFOAM_RETURN Quantiles of ZENIT HBN_RETURN

Figure 4.3 Normality Test Result

4.2 Stationary/Unit Root Rests Results

The ADF and PP statistics are in absolute terms larger than the associated 5% critical value for
each of the stock (company) returns. This confirms the rejection of the null hypothesis that return
has a unit root. The KPSS statistic shows lower values than the 5% critical values. Thus, there is
a strong evidence that the underlying series is nonstationary at levels.
The results of ADF, PP, as well as that of KPSS provide evidence that the Nigeria index are
nonstationary at level. Therefore, the results are consistent with the random walk hypothesis.

Table 4.1. Unit Root Result

Company ADF-Test PP-Test KPSS-Test
Stat CV @ 5% Stat CV @ 5% Stat CV @ 5%
DANGCEM -11.22 -2.89 -11.23 -2.89 0.06 0.46
DANGSUG -6.27 -2.89 -11.53 -2.89 0.08 0.46
GUINNES -10.70 -2.89 -10.89 -2.89 0.26 0.46
JBERGER -11.53 -2.89 -11.96 -2.89 0.16 0.46

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NEIMETH -9.02 -2.89 -8.88 -2.89 0.08 0.46

OKOMUOI -11.17 -2.89 -11.17 -2.89 0.08 0.46
PZ -12.89 -2.89 -12.79 -2.89 0.06 0.46
UPDC -10.51 -2.89 -10.50 -2.89 0.06 0.46
VITAFOAM -9.84 -2.89 -9.81 -2.89 0.63 3.12
ZENITHBN -9.70 -2.89 -9.70 -2.89 0.06 0.46

Test of Non-Linear Independence

4.3 The BDS Test Result
The BDS test results reveal that the null hypothesis (IID) is rejected by only two of the companies’
(Dangote Sugar and Okomu-Oil) returns at alpha value of 5%. This means that the returns of these
companies are dynamically correlated, making prediction possible; while, we do not observe
(significant auto-correlation) the possibility of precise prediction for the other eight companies.

Table 4.2 BDS test results

Company Dimension BDS Statistic Std. Error z-Statistic Prob
DANGCEM 2 0.006422 0.008379 0.766405 0.4434
DANGSUG 2 0.026640 0.008793 3.029581 0.0024
GUINNESS 2 0.006015 0.008789 0.684370 0.4937
JBERGER 2 0.003173 0.007693 0.412427 0.6800
NEIMETH 2 0.015649 0.008145 1.921417 0.0547
OKOMU-OIL 2 0.020116 0.009487 2.120321 0.0340
PZ 2 0.009669 0.007785 1.242011 0.2142
UPDC 2 0.011338 0.009260 1.224500 0.2208
VITAFOAM 2 0.014225 0.007998 1.778484 0.0753
ZENITHBN 2 0.012594 0.007020 1.793867 0.0728
Note the test was conducted strictly based on 2 embedded dimensions

4.4 The Box-Ljung Test Result of the Serial Correlation Coefficients

The tests show evidence of both positive (for Neimeth) and negative autocorrelation relationships
(for the rest nine stocks). However, this relationship is found to be significant at 5% alfa level for
Neimeth stock only.
The test result suggest that the serial correlation coefficient is significant for Neimeth at 5% alfa
level while the serial correlation coefficient is not significant for the rest stocks. Taken together,
there is no significant correlation between share prices over time.
The implication is that the changes in the prices of shares traded on the floor of the Nigerian stock
exchange are independent and unpredictable.
When 𝜀 is serially correlated, tomorrow’s price depends upon today’s price and is therefore (partly)
forecastable from the information available today. Insignificant serial correlations for all lags
would indicate that the markets are perfect and may be efficient in the weak form and follow a

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random walk. The presence of significant serial correlations would have led us to refute the random
walk hypothesis.

Table 4.3 The Ljung- Box's Test Results

Company Lag ACF PACF Q-Stat Prob
DANGCEM 1 -0.034 -0.034 0.1446 0.704
DANGSUG 1 -0.064 -0.064 0.5073 0.476
GUINNES 1 0.012 0.012 0.0163 0.898
JBERGER 1 -0.061 -0.061 0.4618 0.497
NEIMETH 1 0.180 0.180 3.9945 0.046
OKOMUOI 1 -0.031 -0.031 0.1191 0.730
PZ 1 -0.173 -0.173 3.7013 0.054
UPDC 1 0.027 0.027 0.0908 0.763
VITAFOAM 1 0.097 0.097 1.1638 0.281
ZENITHBN 1 0.106 0.106 1.3926 0.238
Note the test is based on 1lag length
4.5 Runs Test Result
It is important to note that the null hypothesis or weak-form market efficiency is accepted when
the Z-score is less than the alpha value at 5%.

𝐻0 : The sequence of stock prices/returns is random

𝐻1 : The sequence of stock prices/returns is non-random (systematic).

The results of our investigation based on the runs test are reported in table 4.4.
From the results of runs tests reported in Table 4.4, it is observed that the Z-statistic values of four
(4) of the companies are all negative indicating that the actual runs are less than the expected runs.
Since the Z values or standard scores in respect to four (4) of the companies, which include
Guinness (-0.135), Neimeth (-0.42), Vital Form (-1.24) and Zenith Bank (-1.556), are negative
(less than alpha value at 5%), the null hypothesis is accepted. Hence there is no real evidence to
suggest that the returns are not random. The likelihood of observing a Z statistic near 0 is very
high. We cannot be 95 percent certain that our observed stock prices do not happen by chance
unless we get a Z statistic whose absolute value is 1.96 or greater.
However, in each of the other six (6) companies, the associated p-value to the Z-stat are more than
alpha value at 5%. It means that there are indications that the returns are random (predictable).

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Table 4.4-Runs Test Results

Company Number of Runs Z-Stat Prob
DANGCEM 64 0.816 0.414
DANGSUG 62 0.828 0.408
GUINNES 60 -0.135 0.893
JBERGER 64 0.563 0.574
NEIMETH 56 -0.42 0.674
OKOMUOI 64 0.759 0.448
PZ 62 0.196 0.845
UPDC 68 1.287 0.198
VITAFOAM 54 -1.24 0.215
ZENITHBN 52 -1.556 0.12

4.6 Variance Ratio Tests Results

This evidence of randomness is reinforced by conducting variance ratio test. The variance ratio
test has been suggested in the finance literature as a test of the random walk model.
The study therefore, compares the variances of increments of the different time intervals/lengths
and test the null of RWH against the alternate hypothesis of stationary, keeping in mind that the
test has a null hypothesis of a random walk.
𝐻0 : Equity returns are random
𝐻1 : Equity returns are non-random
The p-value measures the evidence against 𝐻0 (the null hypothesis). The p-value is the smallest α
(alpha) at which we do reject 𝐻0 . The smaller the p-value, the stronger the evidence against 𝐻0 .
If the evidence against 𝐻0 is strong, the p-value will be small.
The tests results presented in table 4.5 below reveal that the evidence against 𝐻0 is strong (very
small p-value, 0.0). Hence rejection of 𝐻0 . This test finds significant evidence of price
predictability by rejecting the null hypothesis of the variance ratio that returns possess uncorrelated
increments (random walk 3) – a violation of the efficient market hypothesis.

Table 4.5: Variance Ratio Test Results

Company Period Var. Ratio Std. Error z-Statistic Probability
DANGCEM 2 0.517708 0.126269 -3.819568 0.0001
DANGSUG 2 0.372639 0.139784 -4.488082 0.0000
GUINNES 2 0.484274 0.114762 -4.493873 0.0000
JBERGER 2 0.490001 0.113685 -4.486083 0.0000
NEIMETH 2 0.666126 0.153766 -2.171307 0.0299
OKOMUOI 2 0.530744 0.120418 -3.896901 0.0001
PZ 2 0.325200 0.156205 -4.319956 0.0000
UPDC 2 0.493389 0.145475 -3.482448 0.0005
VITAFOAM 2 0.578492 0.113801 -3.703908 0.0002
ZENITHBN 2 0.644981 0.119694 -2.966051 0.0030
Note that our test is based on 2 periods, though similar results are obtained in longer periods.

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5. Discussion of Results
An examination of the distribution patterns of stock price changes in the Nigeria Stock Exchange
show that the pattern is approximately normal, thus suggesting that the changes in the prices of
stocks traded on the floor of the Nigerian Stock Exchange is random.
One of the specific objectives of this study is to test the assumptions that a non-linear dynamically
independent relationship exists to a considerable extent in the Nigerian stock market; making the
predictability of the selected stocks impossible.
The overall result suggests that there is no significant correlation between the security prices over
time. Consequently, past prices are independent, and cannot have any predictive power for future
prices.
The results of this study are consistent with Olowe (2002), Rapuluchukwu (2010), Ajao and
Osayuwu (2012); Okpara (2010); Olowe (1999) Keith and Graham (2005), Andabai, (2019), and
Gbalam and Nelson, (2019) who had earlier conducted similar test using share price data from the
Nigerian Stock Exchange. However, the results are inconsistent with the findings of Ekechi
(2002), Inegbedion (2009). Emenike (2008, 2010); Gimba (2012); Afego (2012); Goudarzi (2013)
and Ogbulu (2016), and Ogbonna and Ejem (2020).

6. Summary, Conclusion and Recommendations

6.1 Summary and Conclusion
This study first provides an overview of the theoretical literature on the EMH models as suggested
by Fama (1970), Following the theoretical literature, empirical studies on the weak form of EMH
in Nigeria stock markets have been extensively reviewed, especially in recent years. The empirical
evidences obtained from this study is mixed. Indeed, while some evidences show empirical results
that support the null hypothesis of weak form market efficiency, others report evidences to reject
the weak form market efficiency. 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.
6.2 Policy Implication and Recommendations
The policy implication of this analysis is that the Nigeria Stock Exchange, as an emerging market,
must be closely monitored to achieve an optimal maturity level.
It is therefore recommended that policy makers to enlighten potential investors of the opportunities
that are available in the stock market. Such enlightenment should seek to stimulate their interest
in capital market activities and thus increase the breadth and depth of the capital market.

6.3 Future Research

Future research should be dedicated to the other forms (semi-strong and strong) of the efficient
market hypothesis to also establish their validity or otherwise.
6.4 Contribution to Knowledge
It used a combination of tests.
Most importantly, the study employs the BDS test to analyze the historical prices/returns in
Nigeria.

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Adds to the evidence that the efficient market hypothesis should not be an all or nothing condition
but it should be stated as a time varying condition where prices fluctuate between periods of
efficiency and inefficiency.

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