Academic journal article International Journal of Management

The Efficiency of Stock Markets in the Pricing of Financial Assets: An Analysis of the Nigerian Stock Market (2001-2010)

Academic journal article International Journal of Management

The Efficiency of Stock Markets in the Pricing of Financial Assets: An Analysis of the Nigerian Stock Market (2001-2010)

Article excerpt

An efficient stock market exists when a sufficiently large number of market participants, who in their attempts to earn profits promptly receive and analyze all the information that is publicly available concerning entities whose securities they follow. It is also important to note that, in an efficient market, the same rate of return for a given level of risk/price should be realized by all the investors in the market. The efficiency of stock markets in the pricing of financial assets: An analysis of Nigerian Stock Market was a study carried out to ascertain how prices of financial securities are efficiently determined in the Nigerian Stock Market. Data were collected from libraries, internet, newspapers, NSE's annual report, statistical bulletin, questionnaires and observations. Data collected on financial assets consist of bond stocks, shares debentures, etc. and these were measured in terms of the rate of their trading activities in the Stock Market. Pearson Product Moment Correlation Coefficient analysis was used in the treatment of the research data with a view of testing whether there is a significant relationship between the efficiency of the Stock Market and the pricing of financial assets. The study revealed that the Nigerian Stock Market can efficiently determine the prices of financial assets. Further discovery showed that the Nigerian Stock Market plays a vital role in economic development as it creates a platform for money and capital markets to thrive. It was concluded that the role play by the Nigerian Stock Market in efficient pricing of financial assets, thus ensuring economic growth and development, is significant. Therefore the Nigerian Stock Market should make concrete effort to create awareness about its significant contributions to stock market pricing efficiency so as to encourage potential investors to make more use of it as a means for investing in companies and businesses.

(ProQuest: ... denotes formulae omitted.)


Every economy has a financial system that is usually responsible for regulating the financial environment of the economy; determine what type, and amount of funds to be issued, cost of funds and the use to which these funds are to be put. This financial system is made up of two principal markets; the money and the capital markets (Olowe, 1997 and Van, 1992). While money market is the market for short- term funds and securities, the capital market is a complex institution and mechanism through which intermediates and long-term funds are pooled and made available to businesses, governments and individuals; and the instruments already outstanding are transferred (Ojo, 1993 & 1995; Olowe, 1997 and Van, 1997).

In carrying out its many functions, the financial market thrives to ensure that the pricing of financial assets is done efficiently in such a way that the prices of the financial securities reflect the true economic worth of the firms and their activities. The pricing efficiency of the financial assets by the financial markets ensures effective mobilization of savings and allocation through the market pricing system. It is worthwhile to note that, effective and efficient mobilization of economic resources would lead to economic growth and development. The tasks of this study were therefore, to determine and examine the extent of social and economic efficiency of the Nigerian capital market to the economy with regards to the pricing of financial assets.

Capital asset pricing model

Olowe (1997) opined that, capital assets pricing model (CAPM) shows a relationship between expected return of a security and its unavailable risk, it provides a framework of the valuation of securities. The capital assets pricing model is developed on the following assumptions:

(1) Investors are risk-averse individuals who maximize the expected utility of their end of period wealth. This implicitly implies that the model is a one-period model.

(2) Investors are price takers and have homogenous expectations about securities or (assets) returns that have a joint normal distribution. …

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