The market efficiency of the Tanzania stock market

Josephine Njuguna

doi:10.21511/bbs.11(3).2016.08

Abstract

The purpose of this article is to examine the efficiency of the Tanzania stock market. The study attempts to answer whether the Tanzania stock market is weak-form efficient. The study applies a battery of tests: the serial correlation test, unit root tests, runs test and the variance ratio test using daily and weekly data with a sample spanning from November 2006 to August 2015 for the Dar es Salaam Stock Exchange (DSE) all share index and from January 2009 to August 2015 for the DSE share index. Overall, the results of the market efficiency are mixed. The serial correlation test, unit root test and the runs test do not support weak-form efficiency, while the more robust variance ratio test supports weak-form efficiency for the DSE. The main contribution of the study is that the market efficiency of the Tanzania stock market has increased over the sample period. Keywords: adaptive market hypothesis, efficiency market hypothesis, serial correlations test, unit root test, runs test, variance ratio test, Dar es Salaam Stock Exchange. JEL Classification: G14, G15

Highlights

The purpose of this article is to examine the efficiency of the Tanzania stock market
The study applies a battery of tests: the serial correlation test, unit root tests, runs test and the variance ratio test using daily and weekly data with a sample spanning from November 2006 to August 2015 for the Dar es Salaam Stock Exchange (DSE) all share index and from January 2009 to August 2015 for the DSE share index
The Dar es Salaam Stock Exchange was incorporated in 1996 which was a key milestone in the development of a functioning capital market for the mobilization and allocation of long-term capital to the private sector in Tanzania (Ziorklui, 2001)

Summary

Introduction

The purpose of this article is to examine the efficiency of the Tanzania stock market. The main contribution of the study is that the market efficiency of the Tanzania stock market has increased over the sample period. One side of the debate supports the efficient market hypothesis (EMH) and the assumption that markets are able to efficiently incorporate past information. Few studies on market efficiency have been conducted on frontier markets These markets are characterized by political instability, poor liquidity, thin trading, inadequate. This study will investigate the efficiency of the Tanzania stock market, a frontier market. A study on the challenges faced by the Dar es Salaam stock exchange indicates that the stock market lacks desirable characteristics such as liquidity, availability of information which leads to market efficiency, narrow price spread and high price sensitivity to new information (Massele, Darroux, Jonathan and Fengju, 2013). Other challenges observed in the study include: lack of public awareness and knowledge about capital markets, few market participants, lack of information and communication technology, and advanced technology in trading securities, macro-economic instability and lack of competent experts in financial markets. Mensah (2003) adds that the low market professionalism leads to market inefficiencies and low returns which are realized to active management

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Conclusion