Testing Weak form of Market efficiency of exchange Traded funds at NSE Market
Abstract
Market efficiency is defined as a case when the prices in a market reflects the information,
which is currently available within the market, or otherwise, the market is
said to be inefficient whenever the prices of a financial security in not reflected by
the information available to all local and international investors who are trading in the
securities market. Having a better understanding of the market efficiency when trading
an Exchange Traded Fund of any given set of securities in an exchange market is
extremely vital for any prospective investor who need to make sound investment decisions
as well as market predictions. When trading in a market with few traders who
likes dominating the market through insider trading, it is more likely to experience
securities exchange market without confidence of investors thus depicting weak form
of the efficient market efficiency. Nairobi Securities Exchange market is important in
the economy especially for those companies that are looking forward to capital or startups
in the Kenyan Market from a global perspective. While testing of the weak form
of efficient market hypothesis or EMH of the Nairobi stock exchange (NSE) is done
through daily as well as weekly securities index data from NSE 20 share index over
the period, 2nd February 2002 to May 2nd 2019. The research study applies the use
of secondary NSE data that was derived from Nairobi Stock Exchange market website.
This research has deviated from the normal and conventional linear approach to
test market efficiency and use of using unit roots to test serial correlation. The daily
returns in aspect to skewness as well as kurtosis was found to be non-normal. Similar
demonstrations resulted from the Kolmogorov Smirnov test. From the results, null
hypothesis of the normality was not rejected. In this research, there is the use of fractional
integration thus utilization of ARFIMA to test long term memory and even the
traditional unit root test is incorporated to compare both results thus giving a perfect
conclusion on whether NSE stock market is definitely weak form efficient. Moreover,
NSE-20 share Index stocks are used to make an Exchange Traded Fund that is priced
and forecasted that is important for investors looking forward to make investments at
the NSE Market in Kenya due to its mimicking ability. Ultimately, the forecasted values
of ETF is done on the trendlines similar to the NSE-20 share Index trends, which
investors to make informed financial decisions when buying any securities traded in
NSE market.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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