EMPIRICAL TEST FOR WEAK-FORM EFFICIENT MARKET HYPOTHESIS IN THE NIGERIAN STOCK EXCHANGE
ABSTRACT
In recent years, there has been a great rise in the growth of the Nigerian Stock Exchange as a result of growths in market capitalization, membership, value and volume traded. For example, by December 2009, the All Share index has grown massively to 21804.69 points from 113.4 in January 1993. The rising interest in investment in the NSE therefore raises issues concerning its efficiency. This study therefore seeks to provide evidence of weak form efficiency in the Nigerian Capital Market by hypothesizing serial correlation in historical sequence of stock prices, trend in the movement of observed stock prices, if stock prices follow a random series, and if the Nigerian Stock Exchange is weak form efficient. The stock prices of ten (10) selected companies over the period January 2001 – December 2009 is examined. The tests carried out include the Runs Test, the Serial Correlation Test, the Box – pierce Test and the Wilcoxon Sign Rank Test. Overall results from our test suggest that the NSE is efficient in the weak form. It is therefore recommended that transaction costs are reduced to allow more investment in the bourse, and also the regulatory capacity of the Securities and Exchange Commission (S.E.C) and the Nigerian Stock Exchange, are improved to help maintain and increase the efficiency of the bourse.
 TABLE OF CONTENTS
CHAPTER ONE
1.1    Background of the Study-    -    -    -    -
1.2    Statement of Research Problem-    -    -    
1.3    Statement of Research Question-    -    -    -
1.4    Objective of the Study-    -    -    -    -
1.5    Scope of the Study-    -    -    -    -
1.6    Hypothesis of the Study-    -    -    -
1.7    Significance of the Study-    -    -    -    
1.8    Organisation of the Study-    -    -    -
1.9    Limitations of the Study-    -    -    
CHAPTER TWO
2.1     The Efficient Market Hypothesis-    -    -    
2.2     Models of Weak Form EMH-    -    -    -    -    
2.3     The Random Walk Theory-    -    -    -
2.4     Weak Form Efficiency of Emerging Markets-    -    
2.5     Weak Form Efficiency of Developed Markets-    -    
2.6    Previous Studies on Weak Form Market Efficiency in the
Nigerian Stock Exchange (NSE)-    -    -    -    
 2.7     Overview of the Nigerian Stock Exchange (NSE)-    -
CHAPTER THREE
3.1     Research Design-    -    -    -    -
3.2     Restatement of Hypotheses-    -    -    -    -    
3.3     Data Gathering-    -    -    -    -    -
3.4     Data Analysis-    -    -    -    -    -    -
3.5     Model Specification-    -    -    -    -    
CHAPTER FOUR
4.1     Introduction-    -    -    -    -    
4.2     Test of Hypotheses-    -    -    -    -    -    
4.3     Research Inference-    -    -    -    
CHAPTER FIVE
5.1    Introduction-    -    -    -    -
5.2     Summary of Findings-    -    -    -    
5.3     Discussion of Findings-    -    -    
5.4     Conclusion-    -    -    -    -    -
5.5     Recommendation-    -    -    
5.6     Suggestions for Further Studies-    -
Bibliography -    -    -    -    -    
Appendix -    -    -    
LIST OF TABLES
Table I: Selected Industries-    -    -    -
Table II: Selected Companies-    -    -    -
Table III:  Results of the Runs Test-    -    -    
Table IV: T–Test for Significance of the Auto Correlation Coefficients-    
Table V: Box–Pierce Test for Significance of Auto Correlation
Coefficients-    -    -    -    -    -
Table VI: Signs of Stock Prices-    -    -    -
Table VII: Signs of Stock Price Changes and their Ranks-    -
Table VIII: Research Inference-    -    -    
CHAPTER ONE
1.10    BACKGROUND OF THE STUDY
In the development of the African economic and financial system, Nigeria in recent years has been emerging as an important center as regards economic activities on the continent. This has greatly been due to the unprecedented growth of the Nigerian Stock Exchange between the years 2001 – 2009. This growth has been recorded in terms of membership, value and volume of shares traded in the market, market capitalization and the All Share Index (A.S.I) which is an indicator of the average price level on the bourse. The ASI has grown from 113.4 in January 1993, to 21804.69 points in 2009. (NSE, 2010). All these growths therefore show that there is an increase in investor confidence in the Nigerian bourse.
The rising interest in investment opportunities in the NSE, raises questions about its efficiency. A market is said to be efficient, if it assimilates and responds to new information so rapidly that there is no source of information which will enable an individual investor gain permanent advantage over others. This means that security prices adapt instantly, and without bias to any new information released to the market. (Osazee, 2007).
With the existence of various forms of efficiency (namely; the weak, semi – strong, and strong forms), and with Nigeria having a developing and emerging  economy, it is no surprise that the NSE is being investigated for weak form efficiency. A few earlier studies carried out on the NSE include: Ayadi (1984) and Olowe (1999) and they both provided evidence of efficiency in the weak form in the NSE. (Emenike, 2008).
With lack of further research on the different forms of efficiency in the NSE, it is important to find further empirical evidence to either support or refute the existing studies that indicate that the level of efficiency in the NSE is weak form. Results from this research will go a long way in helping investors, private agents and economic authorities who will use the information to make rational forecasts and decisions about the economic development of the country, as well as their investment decisions.
It is therefore the objective of this study to investigate whether or not the Nigerian Stock Exchange is weak form efficient, using the stock prices of ten (10) quoted companies’ securities that have relative strength in their industries.
The concept of Relative Strength postulates that. There are a group of stocks that have relative strength in that their prices moves and rises faster than any other stock in their respective industry, and also fall faster, therefore influencing the prices of other stocks in the industry. They are therefore said to be price movers, as they dictate to a large extent, activities in their industries (Osazee, 2007).
1.11    STATEMENT OF RESEARCH PROBLEM
The Nigerian financial environment has changed greatly over the last decade. This has basically been as a result of the various capital market reforms that have been implemented over the years. This has led to an increase in the number and financial value of new issues as well as market capitalization. Furthermore, numerous investors (individual and institutional) are now indicating renewed interests in the market as it grows. There will therefore be a great need for empirical studies aimed at either confirming or refuting previous studies on the level of efficiency obtainable in the Nigerian bourse.
Furthermore, with a clear lack of empirical facts about the level of efficiency obtainable in the Nigerian Stock Exchange (NSE), in the light of current reforms and experience, it is therefore very important that we begin to fill this existing gap in our knowledge by attempting to unravel, the nature of stock price behavior in the Nigerian bourse, as well as the level of efficiency that is obtainable in the market. It is against background that the study attempts to determine if stock prices are random in the Nigerian bourse as well as determine the level of efficiency obtainable in the Nigerian Capital Market.
1.12    STATEMENT OF RESEARCH QUESTION
For this study, the following questions are posed:
a)    Do stock prices in the NSE follow a random series? i.e. does the NSE follow the random – walk theory?
b)    Is there serial correlation in the historical sequence of stock prices quoted on the floor of the NSE?
c)    Is the Nigerian Stock Exchange efficient under the weak form?
d)    Is there any observable trend in the movement of stock prices traded on the bourse?
1.13    OBJECTIVE OF THE STUDY
The objectives of this study are:
I.    To test whether there is any randomness in stock price changes in the NSE,
II.    To ascertain if there is a correlation in the historical sequence of stock price quoted on the floor of the NSE,
III.    To determine if the Nigerian Stock Exchange is weak form efficient, and
IV.    To determine if there is any observable trend in the movement of stock prices traded on the NSE.
1.14    SCOPE OF THE STUDY
The scope of this study will be limited to the Nigerian Capital Market with special reference to the stock prices of selected firms whose security prices displays relative strength in their respective industries. For the study, stock price data of ten (10) Nigerian firms will be analyzed for the period spanning the years 2001 – 2009. The only restriction made in selecting the stocks is that price data must have been available for the entire period covered, i.e. the firm must have been in existence since January 2001, and price quotations for the stock must have been available since then. Another restriction made, is that the securities of such firms must have been seen to display relative strength in their respective industries for the period under study.  
1.15    HYPOTHESIS OF THE STUDY
HO1 – The observed stock price changes follow a random series
H02  - There is no serial correlation in the historical sequence of stock price changes
H03 – The Nigerian Stock Exchange is efficient in the weak form
H04 – There is no observed trend in the movement of stocks traded on the bourse
1.16    SIGNIFICANCE OF THE STUDY
This study intends to throw more light on the weak form efficiency of the NSE (as regards the randomness of stock price changes on the bourse). This will significantly help to cover the gap that has been there due to lack of enough research in that area. Also this study would also provide information that would aid stake holders in the stock market in making their diverse decisions, ranging from investment to regulatory decisions. It would also help in future forecasts as regards the stock market development. The study would also aim to give explanations on the behavior of stock prices in the NSE which will increase investor confidence, and in the long run lead to increase in investment and thus increase in the economic development of the country.
Finally empirical results indicating the existence or non existence of efficiency in the Nigerian Capital Market will significantly help solve the problem and suspicion of many potential investors who hold the opinion that share prices can be manipulated by licensed dealers to the detriment of unsuspecting and naïve investors. Results indicating randomness in stock prices, and the existence of efficiency in the bourse, would surely indicate that at the very least, that all current security prices, fully reflect all stock market information plus the historical sequences of prices, price changes, trading volumes and other such details like, odd lot transactions in the market; such that no single investor or licensed dealer can significantly beat the market. This will go a long way in indicating to the relevant authorities, regulators, researchers and investors, that securities price speculation in Nigeria is a ‘fair game’.
1.17    ORGANISATION OF THE STUDY
This study is organized as follows:
       The introduction, which looks at the background, objectives, hypothesis, scope, and significance of the study, as well as statements of research questions and problems, are presented in chapter one.
       The literature review which explores various theories as regards the efficient market hypothesis, the random – walk theory, through the works of other researches on the NSE is presented in chapter two.
    A detailed methodological discussion is made in chapter three. It covers the methods this research has adopted in arriving at its results, specification of models and presentation of data.
    Results from various tests carried out and the discussion of the results are presented in chapter four.
    Summary of our findings, conclusions and policy recommendations as well as recommendations for future studies are presented in chapter five.
1.18    LIMITATIONS OF THE STUDY
           Due to the heavy reliance of this study on secondary data, it is therefore limited by limitations facing research studies which have reliance on secondary data. Theses limitations will include; imprecise data due to a lack of proper record keeping and even coloration on the part of the body keeping the secondary data.