ICT and Market Efficiency: A Case Study of the Nairobi Securities Exchange

Patrick K. Owido, Walter O. Bichanga, Martin Muiruri


The efficiency of a capital market is important if savers funds are to be channeled to the highest valued stocks. A recent review of markets in Africa categorized the Nairobi Securities Exchange as one which has no tendency towards weak form efficiency. According to the random walk hypothesis stock market prices evolve in a random pattern and can therefore not be predicted. The weak form hypothesis examines whether or not security prices fully reflect historical returns. The NSE has increasingly used Information and Communication Technology (ICT) in their operation which has improved the integrity of the exchange trading systems and facilitated greater access to the securities market. ICT gives investors and market makers the opportunity to access current information so as to make informed decisions and may help make the market more efficient.  In an effort to establish efficiency of this market, we used non-parametric methods to establish the randomness of market returns at the NSE. The distribution of market returns appears normal although slightly negatively skewed and heavy tailed. The Q-Q and P-P plot also shows that the data approximates the normal distribution. The K-S and Runs test confirm that the data is not normally distributed which implies inefficiency in the weak form. This signifies market inefficiency of the weak form.

Keywords:Random Walk, Market Efficiency, Weak form hypothesis, Frequency Tests, Runs test, Autocorrelation test, Kolmogorov-Smirnov test

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