Testing the Weak Form Efficiency of the Nairobi Securities Exchange

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Daystar University


The vast majority of efficient market research to date has focused on developed markets. Far fewer studies have investigated the developing or the less developed markets and, studies performed on this area on the Nairobi Securities Exchange provide mixed and contradictory evidence. In the wake of the increased realization of the role played by stock markets in emerging economies and the improvements witnessed in the NSE, the weak form efficiency of the NSE is re-examined. The research reports the results for parametric (auto-correlation test) tests and non-parametric tests (Kolmogorov–Smirnov normality test and runs test) for the hypothesis that the NSE 20 Index returns follow a random walk, for the period beginning 1st September 2003 to 31st August 2012. The tests are performed using daily, weekly and monthly returns for the whole period and for three sub-periods to determine whether the level of weak-form efficiency has increased in recent years. The empirical results for this research found that the index return series do not follow the Random Walk model and significant positive auto-correlation coefficients at different lags for all periods and types of data rejected the null hypothesis of weak form efficiency at the NSE. The study however found out that the N20I has been approaching a random walk behavior since year 2006, with a decrease in the serial dependence of returns. Rejection of the RWH in the NSE indicates that stock prices do not fully reflect all historical information. The NSE should therefore undergo further technological and regulatory improvements in order to improve informational efficiency.



Weak Form Efficiency, Nairobi Securities Exchange


Testing the Weak Form Efficiency of the Nairobi Securities Exchange by Sam Kim Murithi, Daystar University, 2013.