Test of Inefficient Stock Market: Case of BRVM
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Test of Inefficient Stock Market: Case of BRVM Dr. Ibrahim Ngouhouo1, Tsague Joel2 1Vice Dean, Faculty of Economics and Management, University of Dschang 2Ph.D. Student, Faculty of Economics and Management, University of Dschang International Journal of Commerce & Business Studies Volume 2, Issue 3, July-September, 2014, pp. 01- 10 ISSN Online: Online: 2347-2847, Print: 2347-8276, DOA : 06062014 © IASTER 2014, www.iaster.com ABSTRACT The purpose of our study is to examine the efficiency of weak form of the regional stock exchange (BRVM). To test our hypothesis that the test is inefficient in weak form, the data sets of daily returns of the BRVM composite index were used, representing 1,712 observations over the period from 2004 to 2010. We conducted the stationary tests and three tests of normality: and it appears that the profitability of the series is stationary but BRVM Composite index do not follow a normal distribution. Finally, the study was devoted to the weak form efficiency test through various tests of no serial correlation namely: Box Pierce test, the Durbin Watson test and the Breusch and Godfrey. These tests did not detect all types of addiction. Thus, these tests showed the absence of serial autocorrelation. Two most powerful tests are applied: The corrected Box Pierce test for heteroscedasticity and the parametric BDS test. So it appears that the BRVM is inefficient in weak form. Which is contradictory to the results of some studies obtained in this market? Keywords: ARCH, BDS; BRVM, Autocorrelation Jel Classification: C1, C2, F3, N27 1. INTRODUCTION The study of the evolution of asset prices is in its infancy analysis in statistical terms following the work of Bachelier (1900). Since then, the behavior of stock prices rise and still arouses the interest of professionals in financial as well as that of university researchers who conducted several studies markets. Fama (1970) by looking at the price action found that they incorporate the past, present and future information as well. So it leads to the concept of market efficiency. It considers efficient a market where stock prices fully incorporate the information available on the market. Fama distinguishes three forms of efficiency: weak form efficiency, semi- strong efficiency and strong form efficiency. Most tests of efficiency of stock markets have been carried out on the developed markets in this case the New York Stock Exchange (NYSE), the London Stock Exchange (LSE) and concluded that they were weak form efficient and semi strong. Testing strong form has never been made directly to the extent that it is clear that someone who has made winning trades using non-public information (inside information) will be the last to recognize it as have fear of falling on the stroke of insider trading. Today researchers pay much more interest to weak form efficiency tests in emerging markets in general and those in Africa in particular. Given the important role that BRVM will play in the economies of UEMOA role, it should pay particular attention to its theoretical as well as practical operation, particularly with regard to its efficiency. International Journal of Commerce & Business Studies (O) 2347-2847 ISSN Volume-2, Issue-3, July-September, 2014, www.iaster.com (P) 2347-8276 The purpose of our study is to examine the efficiency of weak form of the return series of the BRVM composite index. In other words it is for us to see if a speculator who would have as an element the only past information of a financial asset could successfully beat the market. Thus, the main question is whether it is possible to predict future returns from past returns. It is actually to test the efficiency of weak form of the Regional Stock Exchange in Abidjan on the return series of the BRVM composite index. More specifically we will check if stock prices follow a random walk BRVM or if the return series of the BRVM composite index exhibit serial correlation. Among the reasons likely to put into perspective the efficiency of emerging markets we identify a priori the following hypothesis: The Regional Stock Exchange is inefficient in weak form. The interest of our research is both theoretical and practical. Theoretically, this study provide an additional response on the potential possibility of forecasting future returns from past on the Regional Stock Exchange returns. These will particularly tell us whether it is possible to speculate on the BRVM dependencies yields to achieve excess profit. In practical terms, the result of this research will be of particular interest to business leaders who submit their financial statements to the public for assessing their performance. These results allow investors not only learn better price developments in the BRVM but also understand the features and functions of this market. Our study may provide more visibility in the market and possibly attract international investors. 2. REVIEW OF THE LITERATURE Here, the focus is on results in the emerging countries of Africa and Asia, and in developed countries. Studies done on African markets used mostly time data on stock indices (eg , Appiah Kusi and Menyah , 2003). Smith, Jefferis , Magnusson et al. (2002 ) found that the Johannesburg Stock Exchange ( JSE) was weak form efficient while Appiah Kusi and Menyah (2003 ) found the opposite result for the JSE , but equity markets in Botswana, Ghana , and of the ivory Coast were inefficient in weak form for the period 1990-1995 . They also found that the stock markets of Kenya, Zimbabwe, Egypt, Morocco and Mauritius islands were weak form efficient for the same period. The results for Botswana and Ghana are consistent with those of Magnusson and Wydick (2002), who found that these two markets do not follow a random walk process. Kiweu (1991) drew the same conclusion for Kenya, for the periods 1986-1990 and 1979-1988 respectively. Smith et al (2002), using monthly or weekly rather than daily data for different actions and data are Egypt, Morocco and Mauritius are not weak form efficient. The limiting factor as specified Muragu Dickinson (1990) was the unavailability of automated databases. The other argument on the use of data to measure over a long period is the low transaction volume (Alsa, 2000). Empirical studies on the efficiency of weak form of the Asian market have been extensively carried out in recent years. Mookergee and Yu (1999); Groenwold et al (2003), show that the stock exchanges of Shanghai and Shenzhen are weak form inefficient. For equity markets in Hong-Kong, Cheung (2001) performs an efficiency test on the daily market indices in Hong- Kong, and concludes that the market is weak form efficient. The level of developed countries, Bachelor (1900) in his thesis entitled «theory of speculation», found that the expectation of winning a speculator is zero. In his past events, present events, and even discounted future events are reflected in market prices. In addition, fluctuations are determined by an infinite number of factors which it is impossible to pretend to predict. Thus the dynamics of stock prices is governed by random unpredictable developments. So it seems that the market community of speculators at a given moment cannot believe neither an increase International Journal of Commerce & Business Studies (O) 2347-2847 ISSN Volume-2, Issue-3, July-September, 2014, www.iaster.com (P) 2347-8276 nor a decrease in the market, since for each price side, there will be as many buyers as sellers. Bachelor has introduced the hypothesis that stock prices follow a random walk, where future developments cannot be predicted on the basis of past actions. Paul Samuelson (1965) goes in the same direction, showing that competition then required to balance the expected benefit of speculators is zero. But this requires under certain assumptions the unpredictability of future developments. It demonstrates that properly anticipated prices fluctuate randomly. It offers all the same evidence that, if the smart investors are always looking for good values, selling them when they think they are overpriced and buying them when they are undervalued, the result of this action of smart investors will be that the stock price will quickly aligned with the expected values justified by their prospects. Thus, for the passive investor, who does not seek situations over or undervalued, the price structure is such that one title will be worth another. For the passive investor, luck is also a good selection method than another. In a fundamental article titled “efficient capital markets: a review of theory and empirical work”, Fama (1970) came to offer three types of efficiency: 1) weak form that the information contained in the prices of contracts awarded is reflected in asset prices. 2) The semi-strong form that all public information are completely taken into account by the price. 3) The strong form that all available information is taken into account by the price it was made public or not. In such a market, privileged information is quickly incorporated into the equilibrium prices and profits Insider virtually nonexistent. In the study of the efficiency of the New York Stock Exchange, Fama (1965) found in the vast majority of cases that, the degree of association between changes in price is very low. He noted however, that the number of negative correlations is abnormally low for the interval of a day and abnormally high for intervals of four and ten days. It happens to the conclusions that there is not complete independence of price changes. However, even when a dependency exists, the very low percentage of explained variation leads the author to conclude that such a weak dependence can be exploited in order to achieve a net profit. In 1966, Fama and Blume have applied the technique to filter the New York Stock Exchange using filters ranging from o, 5 to 50%.