Can Emerging African Stock Markets Improve Their Informational Efficiency by Formally Harmonising and Integrating Their Operations?

Abstract

Despite experiencing rapid growth in their number and size, African stock markets remain highly segmented, small, illiquid and technologically bankrupt, severely affecting their informational efficiency. On this basis, with specific focus on the weak-form of the efficient markets hypothesis, we attempt to empirically ascertain whether African stock markets can improve their informational efficiency by formally harmonising and integrating their operations using a new robust non-parametric variance-ratios test in addition to its parametric alternative. On average, we find that irrespective of the diagnostic used, all the 24 African continent-wide indices applied returns’ display better normal distribution properties than those of the 8 individual national stock price indices examined. We record evidence of statistically significant improvements in the informational efficiency of the African continent-wide stock price indices over the individual national stock price indices used irrespective of the test statistic applied. The potential improvement in efficiency to be gained is much higher in economic sectors indices than in size and regional indices. Finally, consistent with prior evidence, (eg., Wright, 2000; Belaire-Franch and Opong, 2005, Ntim, et al., 2007), the results of the Lo and MacKinlay (1988) parametric variance-ratios test are ambiguous. By contrast, the ranks and signs alternative offer consistent results throughout.

Keywords: African stock markets, Integration, Efficiency, Variance-ratios, Ranks and signs

JEL Classification: G11, G12, G14