Unobserved structural shifts and asymmetries in the random walk model for stock returns in African frontier markets

David De Villiers,Natalya Apopo,Andrew Phiri,David Mcmillan

doi:10.1080/23322039.2020.1769348

David De Villiers, Natalya Apopo + Show 2 more

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https://doi.org/10.1080/23322039.2020.1769348

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Abstract

The purpose of this study is to examine the weak-form market efficiency hypothesis (EMH) for 8 African Frontier markets between 2001 and 2017. To achieve this purpose, we employ unit root testing p...

Highlights

Following the seminal influences of Harrod (1939) and Domar (1946) and the subsequent contributions of Solow (1965), Swan (1965) and Lucas (1988), the evolution of an economy’s capital stock has been unanimously considered as the engine of dynamic economic growth and development
Even though the Efficient market hypothesis (EMH) has secured a considerable amount of empirical support within the academic literature, more for advanced Western economies (see Titan (2015) for an exhaustive review of the associated literature), practioneers and other observers have questioned the validity of the theory considering the number of re-occurring stock market crashes which have translated into larger, and in more severe cases, global financial crisis that have threatened the very essence of global economic stability
Concerned with whether African capital markets are efficient, in the weak-form sense, our study applied a nonlinear unit root test augmented with a flexible Fourier form (FFF) to 8 African frontier markets (South Africa, Botswana, Mauritius, Kenya, Nigerian Stock Exchange (Nigeria), Tunisia, Egypt and Morocco) which collectively account for over 95 percent of total market activity in the content

Summary

Introduction

Following the seminal influences of Harrod (1939) and Domar (1946) and the subsequent contributions of Solow (1965), Swan (1965) and Lucas (1988), the evolution of an economy’s capital stock has been unanimously considered as the engine of dynamic economic growth and development. Economic Nobel laureates Paul Sameulson (1965) and Eugene Fama (1965) were amongst the first to recognize that the trajectory of returns on security prices can provide simple yet powerful inferences on the efficiency of capital markets considering the rationale behaviour of market participants. The FamaSamuelson synthesis argues that the independence of a sequence of changes in security prices implies that equilibrium conditions of production-investment decisions within capital markets satisfy a ‘fair game’ model in which speculative behaviour does not yield any predictable gains. In academic jargon, this phenomenon is more popularly branded as the efficient market hypothesis and has since its inception undergone severe criticism concerning its validity. Even more recently there has emerged a new breed of economists who have emphasized on the psychological and behavioural elements of stock-price determination and strongly believed that stock prices must be at least partially predictable on the basis of past price behaviour as well as other certain valuation metrics (Malkiel, 2003)

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