Testing the weak form Market Efficiency of selected African Stock Markets

Abstract

The ability of African stock markets to operate effectively depends on their level of informational efficiency. This study tests the weak form efficiency of six African stock markets which comprised three smaller and three larger stock markets. Using monthly and weekly stock market returns series from 1995 to 2013, the study tested the degree of weak form market efficiency by employing unit root tests, run test and the more robust Wright’s variance ratio test. By employing a general autoregressive conditional heteroscedasticity (GARCH) approach with time varying parameters on the monthly stock market returns series, a test of evolving efficiency which captures gradual changes in efficiency was carried out. The results shows that the three larger markets used in the study, Egypt, South Africa and Zimbabwe, were found to be weak form efficient. Among the smaller markets used in this study, Mauritius was found to be weak form efficient while Ghana and Nigeria were not weak form efficient. In order to improve efficiency of African stock markets, securities and exchange commissions of stock markets in Africa are encouraged to set up information dissemination institutions to enhance the dissemination of information relating to stock market.