Are African Stock Markets Inefficient or Adaptive? Empirical Literature

Abstract

This chapter reviews empirical studies on weak form of efficiency with the aim of establishing whether the African market is inefficient or adaptive. The reviewed studies are categorised based on their methodological approaches to compare the power of linear and non-linear models in testing for weak-form efficiency. The studies on calendar anomalies, an indication of weak-form inefficiency, are reviewed to assess whether these anomalies are adaptive as portrayed by the relatively recent theory of adaptive market hypothesis (AMH). The scope of reviewed studies is also extended to developed and emerging markets to gain a broad comparison of the findings. This review revealed that non-linear dependence has been revealed in stock returns suggesting that non-linear models are best fit to test for the stock market efficiency. Reviewed studies produced contradictory findings with some supporting and others rejecting weak-form efficiency. Thus, most studies support the AMH, which suggests that market efficiencies and anomalies are time changing. This chapter concludes that most of the existing studies on AMH have been carried out in markets other than Africa, and hence, further empirical studies on the evolving and changing nature of efficiency in African stock markets are recommended.

Is Stock Prices Reflected in Market Ratios?

“…The Efficient Market Hypothesis concludes that it is impossible to beat the market because their fair value consistently values stocks, therefore, purchasing stocks that are undervalued and/or selling them at excessive prices is the worst act in the trading market. However, market predictions contradict the financial theory of the market hypothesis which states that investors cannot constantly beat the stock market, hence a theory called the Adaptive Market Hypothesis emerges (Obalade and Muzindutsi, 2020). This theory links the rational, Efficient Market Hypothesis with financial principles that have irrational behavior.…”

“…In this context, natural selection determines who is involved in market interactions. The investors who suffered heavy losses due to the emergence of the technology bubble may have left the capital market, leaving the investor population different when compared to the previous four years (Obalade and Muzindutsi, 2020).…”