Why Is the Effciency of African Markets Decribed as Weak?
TOPIC: WHY IS THE EFFICIENCY OF AFRICAN STOCK MARKETS DESCRIBED AS WEAK?
INTRODUCTION
About two-thirds of African stock markets emerged in the late 1980s and early 1990s. The latest arrival is the Douala Stock Exchange in Cameroon, which was established in 2003, making it the youngest stock market on the African continent.
Most of these markets were formed at the instigation of government to act as vehicles to privatize state-owned enterprises (Mlambo, Biekpe, 2001; Moss, 2004).
African stock exchanges are also the smallest in the world in terms of both number of listed stocks and market capitalization. They are also small relative to their economies, with the market capitalization of the Nigerian Stock Exchange only representing 8 percent of gross national product (GNP), while in the case of Zimbabwe, Kenya and Ghana, the market capitalizations ranged from 25 percent to 35 percent of GNP (Kenny and Moss, 1998). The largest African stock market in terms of market capitalization is the Johannesburg Stock Exchange
The majority of stock markets in Africa trade daily, from Monday to Friday (Sunday to Thursday in Egypt), except for a few such as Ghana, Tanzania, and Uganda, which, in 2002 were trading three times a week. Ghana was trading on Monday, Wednesday and
Friday, while Tanzania and Uganda were trading on Tuesday, Wednesday and Thursday Trading times also vary, ranging from one hour per trading day in Tanzania to the whole business day in Zimbabwe.
THE EFFICIENT MARKETS HYPOTHESIS
For a stock market to be efficient, movements in prices of the market’s underlying securities must be characterized by a random walk based on currently available information. From Fama [1970], the strong form of the efficient markets hypothesis states that an equity market efficiently converts all information into accurate security prices such that no information of any kind, public or private, will help investors achieve superior returns.
The weak form of the
INTRODUCTION
About two-thirds of African stock markets emerged in the late 1980s and early 1990s. The latest arrival is the Douala Stock Exchange in Cameroon, which was established in 2003, making it the youngest stock market on the African continent.
Most of these markets were formed at the instigation of government to act as vehicles to privatize state-owned enterprises (Mlambo, Biekpe, 2001; Moss, 2004).
African stock exchanges are also the smallest in the world in terms of both number of listed stocks and market capitalization. They are also small relative to their economies, with the market capitalization of the Nigerian Stock Exchange only representing 8 percent of gross national product (GNP), while in the case of Zimbabwe, Kenya and Ghana, the market capitalizations ranged from 25 percent to 35 percent of GNP (Kenny and Moss, 1998). The largest African stock market in terms of market capitalization is the Johannesburg Stock Exchange
The majority of stock markets in Africa trade daily, from Monday to Friday (Sunday to Thursday in Egypt), except for a few such as Ghana, Tanzania, and Uganda, which, in 2002 were trading three times a week. Ghana was trading on Monday, Wednesday and
Friday, while Tanzania and Uganda were trading on Tuesday, Wednesday and Thursday Trading times also vary, ranging from one hour per trading day in Tanzania to the whole business day in Zimbabwe.
THE EFFICIENT MARKETS HYPOTHESIS
For a stock market to be efficient, movements in prices of the market’s underlying securities must be characterized by a random walk based on currently available information. From Fama [1970], the strong form of the efficient markets hypothesis states that an equity market efficiently converts all information into accurate security prices such that no information of any kind, public or private, will help investors achieve superior returns.
The weak form of the