Non-linear approach to Random Walk Test in selected African countries

Abstract

Purpose-The purpose of this paper is to reexamine the weak form efficiency of five African stock markets (South Africa, Nigeria, Egypt, Ghana and Mauritius) using various tests to assess the impact of non-linearity effect and thin trading which are prevalent in African markets on market efficiency. Design/methodology/approach-The weekly returns of S&P/IFC return indices for five African countries over the period 2000-2013 were obtained from DataStream and analyzed. The study adopted the newly developed Non-Linear Fourier unit root test advanced by Enders and Lee (2004, 2009) which allows for an unknown number of structural breaks with unknown functional forms and non-linearity in data generating process of stock prices series to test the Random Walk Hypothesis (RWH) for the five markets, and an augment regression model. Findings-In light of the empirical evidence the author(s) using Non-linear Fourier Unit Root Test only fail to reject the RWH for South Africa, Nigeria and Egypt leading to the conclusion that these markets follow the RWH and weak-form efficient whilst Ghana and Mauritius are weak-form inefficient. Besides, evaluating non-linear models without adjusting for thin trading effect shows that, South Africa and Ghana markets are weak-form efficient while Nigeria, Egypt and Mauritius are not. However, after accounting for thin trading effect, the author(s) find that South Africa and Egypt markets follow the RWH. The findings imply that market efficiency results depend on the methodology used. Originality/value-This paper provides further evidence on stock market efficiency in emerging markets. The finding suggests that thin trading and non-linearity effect influences markets efficiency tests in African stock markets. Thus, recent structural adjustment and liberalization policies have not enhanced stock market operations in Africa. This paper therefore has implications for policy makers and international investors.

Random walks and market efficiency tests: evidence on US, Chinese and European capital markets within the context of the global Covid-19 pandemic

“…In general the obtained results are hybrid, since we have total and partial rejections of the random walk hypothesis and the information efficiency hypothesis. These results are in accordance with evidence obtained by other researchers, namely with the studies of Richards (1997), Worthington and Higgs (2013), Dsouza and Mallikarjunappa (2015), Hamid et al (2017), Aggarwal (2018), Sadat and Hasan (2019) and, partially, with those of Ngene et al (2017), Abakah et al (2018) and Malafeyev et al (2019).…”

Testing the Weak Form of Efficient Market Hypothesis: Empirical Evidence from Equity Markets

“…Gimba, McKerrow, N'Dri, Abakah, Alagidede, Mensah and Ohene-Asare [54][55][56][57], tested the chances of random walk hypothesis in African markets. Gimba [54] studied the Nigerian Stock Exchange (NSE), analyzed daily data from January 2007 to December 2009, and weekly data from June 2005 to December 2009.…”

“…The results suggest that random walk hypothesis cannot be rejected, evidencing that BRVM markets are efficient in its weak form. Abakah, Alagidede, Mensah e Ohene-Asare [57] examined the markets of South Africa, Nigeria, Egypt, Ghana and Mauritius during the period 2000-2013. The authors suggest mixed results, arguing that used methodology may indicate different results.…”

Efficient Market Hypothesis in the Presence of Market Imperfections: Evidence from Selected Stock Markets in Africa

“…Similarly, in Africa, empirical studies conducted remain inconclusive yielding weak-form efficient (Adigwe et al, 2017;Bulla, 2015;Bundoo, 2000;Simons and Laryea, 2005; Van et al, 2013), inefficient (Awiagah and Choi, 2018;Ayentimi et al, 2013;Chikoko and Muparuri, 2013;Katabi and Raphael, 2018;Lawal et al, 2017;Nwidobie, 2014;Smith, 2008;Zaman, 2019), mixed results (Abakah, et al, 2018;Phiri, 2015;Vitali and Mollah; and strong-form efficient (Kelikume, 2016) (see Table 1, Appendix-I).…”

“…Empirical studies conducted for Africa remain inconclusive with mixed reports. This contrary reports are evident in the works (Adigwe, Ugbomhe and Alajekwu, 2017;Bulla, 2015;Bundoo, 2000;Simons and Laryea, 2005; Van et al, 2013) which supported weak-form efficient market hypothesis, but many studies documented inefficient market hypothesis (Awiagah and Choi, 2018;Ayentimi, Mensah and Naa-Idar, 2013;Chikoko and Muparuri, 2013;Katabi and Raphael, 2018;Lawal, Somoye and Babajide, 2017;Nwidobie, 2014;Smith, 2008;Zaman, 2019); while few studies reported mixed results (Abakah et al, 2018;Phiri, 2015;Vitali and Mollah, 2015). Additionally, Kelikume (2016) recorded strong-form efficient market hypothesis.…”