The Efficient Markets Hypothesis, Distribution theory of runs and Equity returns in Nigeria
AGBAM, Azubuike Samuel DAPPA, Idanyingi Princewill
Abstract
Runs test is a statistical procedure which determines whether the sequence of returns within the distribution have been derived with a random process or not. This study examines the efficiency of The Nigeria Stock Exchange in the weak-form level and the predictability of equity prices/returns using monthly observations. The data set covers the period of ten years- January, 2013 to December, 2022. The stocks were randomly selected based on their ability to trade frequently on the floor of the market, and absorb the shocks of thin trading with irregular hiking. All time-series data were obtained from The Nigeria Stock Exchange database. The study employed non-parametric tool: runs test. Based on the result of the runs test, it can be concluded that the monthly stock return series do not move randomly hence the NSE is not weak form efficient. The policy implication of the analyses is that the Nigeria Stock Exchange, as an emerging market, must be closely monitored to achieve an optimal maturity level. It is therefore recommended that policy makers to enlighten potential investors of the opportunities that are available in the stock market. Such enlightenment should seek to stimulate their interest in capital market activities and thus increase the breadth and depth of the capital market.
Keywords
Stock markets
random walk
efficient markets hypothesis
runs tests
The Nigeria Stock
References
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Samuelson, P. A. (1965). Proof that properly anticipated prices fluctuate randomly. Industrial
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A Working Paper. http://paper.ssrn.com/so13/paper.cfm?abstract_id=874808.
Spiegel, M.R. and Stephens, L.J. (1999), Schaum’s outline of theory and problems of statistics
(third edition), USA: McGraw Hill Inc.
Strong, R. A. (2004). Practical investment management, third edition, Canada: Thomson: South
Strong, R. A (2006). Portfolio management handbook, Fourth Jaico Impression, Delhi-India,
JAICO PUBLISHING HOUSE.
Tyson, E. (2003). Investing for dummies, third edition, New Jersey: Wiley Publishing Inc.
Udom, I. S., & Richard, E. O. (2019). Implications of stock market efficiency on Nigerian
manufacturing sector performance. Global Advanced Research Journal of Management
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in emerging markets: A revisit, The Financial Review 42, 303-317.
Adams, N. T., Booth, P. M., Bewie, D. C. & Freeth, D. S. (2003), Investment
mathematics,
Chichester, England: John Wiley & Sons Ltd.
Afolabi, L. (1998). Monetary economics, revised edition, Surulere-Lagos, Nigeria: PERRY
BARR LTD.
Agbonifoh, B. A. & Yomere, G. O. (2002). Research methodology in the social sciences and
education, Benin City: Centre-piece Consultants Limited.
Alfred, D. D. (2007). Corporate finance: Issues, investigations, innovations and applications,
Second edition, Lagos-Nigeria: High Rise Publications.
Bailey, R. E. (2005). The economics of financial markets, Cambridge, UK: Cambridge University
Press
Barnes, P. (1986), Thin trading and stock market efficiency: The case of the Kuala Lumpur
stock exchange, Journal of Business, Finance and Accounting, 13 (4) 609-617.
Bhalla, V. K. (2012). Investment management: Security analysis and portfolio management,
RAMNAGAR, New Delhi, S. Chand & Company.
Brealey, R. A. (1969). An introduction to risk and returns from common Stock, Cambridge Mass
MIT press.
Bujang, M. A, & Sapri, F. E. (2018). An application of the runs test to test for randomness of
observations obtained from a clinical survey in an ordered population. Malaysia Journal
of Medical Science; 25(4):146–151. https://doi. org/10.21315/mjms2018.25.4.15
Chawla, D & Sondhi, N. (2016). Research methodology: Concepts and cases. Second edition,
India: VIKAS Publishing House, PVT LTD
Cheney, J. M. & Moses, E. A. (1992). Fundamentals of investments, New York – West Publishing
Company.
Cowles, A. (1933). Can stock market forecasters forecast?.Econometrica, 1, 309-324.
Cowles, A. (1944). Stock market forecasting, Econometrica, 12, 206-214.
Cunningham, L. A. (1994). From random walks to chaotic crashes: The linear genealogy of the
efficient capital market hypothesis. The George Washington Law Review 546-551.
DeBondt, W., & Thaler, R. F. (1985). Does the stock market overreact? Journal of
Finance, 40: 793-805.
Dickinson, J. P. & Muragu, K. (1994), Market efficiency in developing countries: A case study
of the Nairobi stock exchange. Journal of Business Finance & Accounting, 21(1), 133–
Easterling E. (2005). Unexpected returns: Understanding secular stock market cycles. Canada,
Cypress House.
Fabozzi, F. J., Focardi, S. M. & Kolm, P. N. (2006). Financial modeling of the equity market: From
CAPM to cointegration. New Jersey, John Wiley & Sons Inc.
Fama, E. F. (1965). The Behavior of Stock-Market Prices. Journal of Business 38(1), 34-105.
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of
Finance, 28(2), 383-417.
Fama, E. F. (1991). Efficient capital markets: II. Journal of Finance, 46(5), 1575-1617.
Fama, E. F. & Blume, M. (1966). Filter rules and stock market trading profits. Journal of
Business 39, 226-241.
Fama, E. F. & French, K. (1988). Permanent and temporary components of stock prices. Journal
of Political Economy, 96(2), 246–273.
Fama, E., Fisher, L., Jensen, M., & Roll, R. (1969). The adjustment of stock prices to new
information. International Economic Review, 10: 1-21.
Gujarati, D. N. (2003), Basic Econometrics (4th Ed), Delhi: McGraw Hill Inc.
Gujarati, D.N. & Porter, D.C., 2009. Basic econometrics, fifth edition., Boston: McGrawHill.
Jordan, B. D. & Miller Jr., T. W. (2008). Fundamentals of investment: Valuation and
management, fourth edition, New York, McGraw-Hill.
Korsvold, P. & Jennergren, L. (1974). Price formation in the Norwegian and Swedish stock
markets - Some random walk tests. Swedish Journal of Economics, 76(2), 171-185.
Levinson, M. (2006). Guide to financial markets, fourth edition London: The Economist.
Mood, A., (1940). The distribution theory of runs, Annals ofMathematica1 Statistics, 11, 367-
NSE (2019) Market model and trading manual-equities, Issue 2, October.
Obadan, M. I. & Iyoha, M. A. (1999). Macroeconomic policy analysis: Tools, techniques, and
applications to Nigeria, Ibadan: National Centre for Economic Management and
Administration.
Olowe, R. A. (1996). Financial management: concepts, analysis and capital investments. First
edition. Lagos: Brierly Jones Nigeria Ltd.
Poshakwale, S. (1996), Evidence on Weak Form Efficiency and Day of the Week Effect in the
Indian Stock Market, Finance India 10, 605-616.
Rahman, S. & Hossain M. F. (2006), Weak-form efficiency: Testimony of Dhaka stock
exchange, Journal of Business Research, 8, 1-12.
Roberts, H. V. (1959). Stock-market “pattern” and financial analysis: Methodological
suggestions. The Journal of Finance 14: 1–10.
Roberts, H. (1967). Statistical vs clinical prediction of the stock market. Unpublished
manuscript. Centre for Research in Security Prices, University of Chicago.
Samuelson, P. A. (1965). Proof that properly anticipated prices fluctuate randomly. Industrial
Management Review 6, 41-49.
Simons, D. & Laryea, S. A. (2004), Testing the efficiency of selected African stock markets,
A Working Paper. http://paper.ssrn.com/so13/paper.cfm?abstract_id=874808.
Spiegel, M.R. and Stephens, L.J. (1999), Schaum’s outline of theory and problems of statistics
(third edition), USA: McGraw Hill Inc.
Strong, R. A. (2004). Practical investment management, third edition, Canada: Thomson: South
Strong, R. A (2006). Portfolio management handbook, Fourth Jaico Impression, Delhi-India,
JAICO PUBLISHING HOUSE.
Tyson, E. (2003). Investing for dummies, third edition, New Jersey: Wiley Publishing Inc.
Udom, I. S., & Richard, E. O. (2019). Implications of stock market efficiency on Nigerian
manufacturing sector performance. Global Advanced Research Journal of Management
and Business Studies, 8 (2), 16-24.
