African stock markets: multiple variance ratio tests of random walks

Abstract

This paper identi®es four categories of formal stock market in Africa: South Africa, medium-sized markets, small new markets which have experienced rapid growth, and small new markets which have yet to take o . The hypothesis that a stock market price index follows a random walk is tested for South Africa, ®ve medium-sized markets (Egypt, Kenya, Morocco, Nigeria and Zimbabwe) and two small new markets (Botswana and Mauritius) using the multiple variance ratio test of Chow and Denning (Journal of Econometrics, 58, 385±401, 1993). The hypothesis is rejected in seven of the markets because of autocorrelation of returns. For the South African market, the stock price index follows a random walk. The paper also suggests factors which may contribute to whether or not an equity market follows a random walk.

Stock market integration in Africa

“…The few studies are largely concentrated on return predictabilities and efficiency of these markets. These include Graham and Smith (2006), Jefferis and Smith (2005), Appiah-Kusi and Menya (2003), Magnusson and Wydick (2002), Smith, Jefferis and Ryoo (2002) and Dickinson and Muragu (1994). All these studies confirm short term return predictabilities and violations of weak form market efficiency.…”

Testing the weak‐form efficiency in African stock markets

“…This is mainly due to the difficulty of obtaining data of sufficient frequency and duration for any meaningful empirical analysis (e.g., Smith et al, 2002). Samuels and Yacout (1981) and Parkinson (1984) are among the pioneers to examine the weak-form efficiency in Africa using autocorrelation tests, although they offer conflicting results.…”

“…By contrast, Magnusson and Wydick (2002) Smith et al (2002) and Jefferis and Smith (2005) have also investigated the return behaviour of a group of African stock markets indices. While Smith et al (2002) use Chow and Denning's (1993) multiple variance-ratios test to examine the weak-form efficiency in weekly stock market index series from 1990 to 1998 of eight African countries, Jefferis and Smith (2005) Their results show that weekly stock indices in Egypt, Kenya, Morocco, Mauritius, and Zimbabwe are weak-form efficient, while those of Botswana, Ghana, Ivory Coast, Nigeria, South Africa, and Swaziland are not efficient.…”

“…While Smith et al (2002) use Chow and Denning's (1993) multiple variance-ratios test to examine the weak-form efficiency in weekly stock market index series from 1990 to 1998 of eight African countries, Jefferis and Smith (2005) Their results show that weekly stock indices in Egypt, Kenya, Morocco, Mauritius, and Zimbabwe are weak-form efficient, while those of Botswana, Ghana, Ivory Coast, Nigeria, South Africa, and Swaziland are not efficient. Finally, using autocorrelation, run, and the multiple variance-ratios tests, Simons and Laryea (2006) examine the weak-form efficiency of weekly equity market indices of Egypt, Ghana, Mauritius and South Africa from 1990 to 2003.…”

“…This severely affects their informational efficiencies. However, the ability of African stock markets to effectively perform the above listed roles depends on their level of informational efficiency (Smith et al, 2002). This raises a crucial policy question as to whether African stock markets can improve their informational efficiency by harmonising and integrating their operations.…”