Effect Of Micro structure Changes On Market Efficiency: A Case Study Of Nairobi Stock Exchange
Abstract
Mobilizing long term capital is a challenge in Africa with small capital markets.
Although the evidence that long term finance influences economic growth saw a wave
of capital market reform in Mid-1990s, stock markets are yet to make significant
contribution to growth financing. Many stock exchanges across the world are
gradually replacing their traditional physically convened markets with electronic
markets. Securities markets efficiency in terms of price discovery process is necessary
for the markets to contribute to wealth maximization objective of investors and
economic growth. The Nairobi Securities Exchange (NSE) has also made various
changes to its market microstructure, especially the introduction of an automated
trading system in 2006. The main rationale behind the microstructure changes is to
gain market efficiency. Information is however lacking on how such changes have
affected the informational efficiency of the Exchange. This study tried to determine
whether the introduction of the microstructure changes had improved the
informational efficiency of the securities market. Using a data collection sheet,
secondary data relating to the NSE 20 Share Index for the period spanning 13 years
(2001-2014) was obtained. The data was analysed using non parametric approaches to
measure market efficiency before and after market automation. The results indicate
that mean market returns in the post automation period were higher than those in the
pre automation period. This higher market returns can be attributed to improved price
discovery process. The results from normality tests show that market returns are not
normally distributed in both the periods. In addition, the runs test results reveals that
market returns are more random in the period following automation than the prior
period, implying that the market has improved in efficiency. The general conclusion
of the study is that introduction of automation in the Kenyan securities market has led
to improved market efficiency. The study recommends that the NSE and CMA should
pursue full market automation by enabling online and internet securities trading and
use of mobile money transfer platforms in paying for stock transactions. The study
also suggests further research on specific market automations (CDS, BBO, CMS) to
determine whether the results would be the same. The research could also be extended
to all the individual stocks as opposed to the NSE 20 share index companies used by
the study to determine whether the results would be similar .
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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