Abstract
The importance of the efficiency of the stock market cannot be underestimated, given the critical role the stock market plays through brings together those who demand and supply development finance. It is against this background that this study focused on analysing the weak form efficiency of the Johannesburg Stock Exchange for the period 2005 to 2016 utilising several methodologies which include unit root tests, autocorrelation test and variance ratio. The empirical results from unit root tests indicated that the null hypothesis of a random walk could not be rejected. The same also applied to the autocorrelation test and variance ratio test except for a few instances. Thus irrespective of the few instances which represent the inefficiency of the market, to a greater extent there is evidence of the market being weak form efficient. Thus even though the work done towards ensuring that the market is efficient is commendable, there is need to ensure that further steps are taken to enhance the efficiency of the market. This is, to some extent suggest that investors are able to make abnormal profits from the market.
Highlights
Background to the Study: The efficiency of the stock market is considered to be a very important aspect in the financial markets considering the role that it plays in the mobilisation and allocation of development capital to the broader economy. Fama (1970) defines market efficiency as the speed with which security prices reflect all the available information
If there is heteroscedasticity of the residual, it suggests that the variance ratio test is not the same between price changes which is a basic assumption of the random walk hypothesis (Brooks, 2002)
The first part of the analysis focuses on describing the descriptive statistics of the data and describes the unit root tests using the augmented Dickey-Fuller test and Phillips-Perron, autocorrelation and lastly the variance ratio test
Summary
Background to the Study: The efficiency of the stock market is considered to be a very important aspect in the financial markets considering the role that it plays in the mobilisation and allocation of development capital to the broader economy. Fama (1970) defines market efficiency as the speed with which security prices reflect all the available information. Studies which have examined the importance of the stock market highlight the important role it plays in promoting economic growth (Fama, 1970; Yartey and Adjasi, 2007; Ovat, 2012; Owusu, 2016) These studies highlight that an efficient and liquid stock market is able to efficiently generate and allocate development capital to productive sectors of the economy. According to Strate (2015) South Africa’s stock market (Johannesburg Stock Exchange) was ranked number 12th in terms of financial market development amongst 140 countries, ranked second for regulation of securities exchanges, ranked sixth for availability of financial services and lastly ranked eighth for soundness of banks This has played a very important role in the growth of the country. Unlike the previous studies which have analysed this kind of relationship, the study contributes to a greater extent by analysing three different periods, namely before, during and after the Global financial crisis
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