TESTING THE WEAK-FORM EFFICIENCY OF THE NAIROBI SECURITIES EXCHANGE MARKET

Abstract

In an efficient market, prices of securities always respond rapidly and accurately to new information because there are no delays in system facilitation of trading. The main purpose of the study was to test whether the Nairobi Securities Exchange market is efficient in the weak form. The specific objectives for the study were to determine: If traded stock prices movements on the floor of the Nairobi Securities Exchange market are random and if traded stock prices movements on the floor of the Nairobi Securities Exchange market are non-random. The study reviews four theories which were: efficient market hypothesis, random walk hypothesis, adaptive market hypothesis and behavioral biases theory. This study employed explanatory survey research design as it is concerned with the causal explanation of events. The target population for this study was all 68 listed firms in the NSE for the period 2002-2017. The study selected 20 firms out of current 68 stocks in the NSE representing a 29.4% of the target population. This study utilized secondary data from the NSE office on the daily price lists. The data collected were analyzed using both inferential and descriptive statistics with the help of Statistical Packages for Social Science (SPSS). In this regard, the Kolmogorov-Smirnov goodness of fit test was used together with the descriptive statistics obtained to test the distribution of the return series. In addition, parametric auto-correlation test and the non-parametric runs test were employed to test for serial independence in the daily prices. The research employed a panel type of study.Study results indicated that means for the sampled firms had varying values but all were positive. This strong positive mean return has an indication that the data didn’t follow the random walk model which postulates a zero mean.Values of Skewness and kurtosis coefficients were all above 5% level of significance hence they are not approximately to zero indicating these data are not normally distributed. The study findings indicate that Shapiro-Wilk value was less than 0.05 (Sig. <0.05). This implies that data was considered not to come from a normal distribution because the significance values were less than 0.05 hence data were not normally distributed. The value of Durbin-Watson coefficient in this study was found to be 0.169 indicating non-independent observations because residuals get close to zero. Study findings indicated that all Z statistics value for all firms have negative signs, giving an indication that the run numbers observed were less than the expected numbers of runs for daily price data for NSE firms except for Sasini, Britam, Co-operative and Kengen. Therefore, the study rejected the null hypothesis and concluded that NSE firms’ daily price data were non-random. From the findings of this study, the NSE daily prices do not follow a random walk, it is therefore apparent that the pricing mechanism in the NSE does not utilize all available information. Stock market prices are not informative and the market is inefficient in terms of resource allocation. The study therefore recommends innovative and superior modeling of past daily prices by security analysts or investors to earn superior profits. An evaluation of the factors that make the NSE weak-form inefficient so that specific aimed policies can be implemented to tackle the causes of inefficiency.