Testing Efficient Market Hypothesis of Nairobi Securities Exchange

Abstract

There has been an increased interest in the emerging markets stock exchanges, with scholars and practitioners raising concerns as to the nature of markets in various stock exchange. This study thus will be carried out with an aim to test the efficient market hypothesis at Nairobi Stock Exchange. Specifically, the study will: test the random walk hypothesis for the returns of securities traded and determined. To determine whether stock market exhibits a trend towards increased efficiency over time. The study made use of data that was collected NSE NSE 20-share Index from 1st January 2009 to 31st December 2013. The study will use both parametric and nonparametric tests to analyse the results through STATA. Unit root test, runs test and Autocorrelation tests were carried out to test for the efficient market hypothesis at Nairobi Stock exchange. The study results revealed varied results with the runs tests indicating that NSE follows a random walk hypothesis while the autocorrelation tests and unit root tests showed that NSE was not weak form efficient. The research concluded that the NSE was not weak form efficient, with all the tests rejecting the existence of weak form of hypothesis. This indicates that the market has a flow of public information which affect the trading at NSE. The study further recommends the need to put in place policies to ensure continuous flow of information.