Do Market Reforms Affect Securities Market Efficiency in Kenya?

Abstract

Many stock markets in developing countries are thin, suffer from low liquidity and operate within unstable macro-economic environments. To improve their efficiency levels, markets have embarked on implementing a raft of reforms hoped to propel them towards development. Between 2002 and 2006, a series of reforms were undertaken at the Nairobi Securities Exchange (NSE). Whether these reforms have improved the efficiency of the market still remains unknown. The purpose of this study was to examine the impact of capital markets reforms on the efficiency of the NSE. Using data collected on the NSE-20 Share Index and divided into pre-reform period and post-reform period, the monthly index return was computed as the first difference of the logarithmic share Index. Normality tests were performed using skewness, kurtosis and Ryan-Joiner test to assess the distribution of returns. The efficiency of the market was tested using the Non-parametric runs test to uncover any independency of returns. Finally, the Wilcoxon signed rank test was used to determine the impact of reforms on the price discovery process. Results revealed that mean returns in the post-reform period were higher than mean returns in the pre-reform period, though with higher volatility. This was as a result of an improved price discovery process following reforms. The higher volatility in the post-reform is attributable to the automation of the depository and trading systems. The returns were more random in the post-reform period implying that the market had improved in efficiency, providing support for the Adaptive Market Hypothesis. Licensing of more market makers and adoption of a mixed trading system can further improve market efficiency.

KEY WORDS: Market Efficiency, Adaptive Efficiency, Market Reforms, Nairobi Securities Exchange