Academic journal article The Journal of Developing Areas

Market Efficiency in Developing African Stock Markets: What Do We Know?

Academic journal article The Journal of Developing Areas

Market Efficiency in Developing African Stock Markets: What Do We Know?

Article excerpt


In the late 1980s, many countries in Africa established national stock exchanges with a view to foster financial development and economic growth. This paper provides a survey and synthesis of the extant literature on the efficiency of African equity markets (AEMs). It explores the path of development of stock markets in Africa with an emphasis on their efficiency, trends in performance, and developmental challenges. We find that much of the research into the efficiency of AEMs has focused on weak-form efficiency and the results, though mixed, lean towards rejection of the weak-form efficiency. We also find that the empirical literature has ignored the role of behavioral biases in the analyses of market efficiency, and has treated efficiency as static over different stages of market development. Finally, considering the traditionally small size of most AEMs, increased harmonization and integration of the various national exchanges may improve the informational efficiency and depth of AEMs.

JEL Classifications: G10, G14, O55

Keywords: Efficient Markets Hypothesis, Market Efficiency, African Equity Markets

(ProQuest: ... denotes formulae omitted.)


A major focus of empirical finance literature has centered on the performance of financial markets and their ability to efficiently allocate investment capital in an economy. For many growth strategists, access to investment capital, mainly through well-functioning financial markets, is crucial for growth and development, and especially so in capital- scarce developing countries (Obstfeld, 1994). Consequently, recent years have seen an increasing prominence of stock markets in the developing regions of the World, including Africa. The expansion in stock market activity across the African continent is considered a positive development in view of the potentially significant role financial markets play in the economic growth process. According to Levine and Zervos (1998), stock markets facilitate the pricing and diversification of risk, aid in the price-discovery process of financial assets and in a broad sense enhance the operations of the domestic financial system.

However, the ability of a stock market to contribute to the financial development and growth of an economy depends largely on its informational, operational and allocational efficiency (Lagoarde-Segot and Lucey, 2008). Early research into the efficient markets hypothesis (EMH) has shown that developed markets, particularly the US and UK, are 'efficient' in the sense that security prices reflect currently available information; thus price changes are unpredictable and investors cannot exploit earn abnormal returns on the basis of this unpredictability (see for instance Fama, 1965, 1970; Keane, 1983). More recent research on US securities market provides additional support for the hypothesis that security prices generally follow a random walk, and that the market is informationally efficient (e.g. Gersdorff and Bacon, 2009; Rompotis, 2011). Similar findings have been reported for the UK market as well (see for instance Evans, 2006; Sheikh and Noreen, 2012). However, the relatively few investigations carried out in developing African markets have found them to be mostly inefficient (see for example Smith, 2008; Adelegan, 2009). This finding may not be surprising considering the fact that many of Africa's financial markets are characterized by illiquidity, weak investor base, low market capitalization, poor regulatory framework, and poor accounting and reporting standards (Mlambo and Biekpe, 2005).

In spite of these constraints, African Equity Markets (AEMs) appear to provide remarkably superior returns to investors. For example in 2004, returns on African stocks averaged 44 percent, compared with 30% and 26% return for Morgan Stanley Capital International (MSCI) global index and Standard and Poor's (S&P) index respectively. Similarly, the Ghana stock market in 2004 recorded a growth rate of 144%; making it the world's best performing stock market for that year (Databank, 2004). …

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