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.

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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%. For most securities, they arrived at the conclusion that the policy of buy and hold «engendered higher than those of the art filters profits. Van Horne and Parker (1967), taking as a reference rather than a one-time observation but a rolling average over 100, 150 or 200 days, arrived at a similar conclusion. The application of tests similar to other exchanges, including that of Paris by Semah, Serres and Tessier (1970), has generally shown more mixed results. If the theory of random walk applied fairly on large values actively traded, it was not the same for tracks closer markets.

3. METHODOLOGY

3.1. Presentation of Data and Study of the BRVM Composite Series

Series at our disposal comes from the Regional Stock Exchange. These series represent (the values of the composite index BRVM observed from January 04, 2004 to 31 December 2010), a total of 1712 observations. Data are collected as a secondary source on the Internet in the financial information site of BRVM. We chose a daily frequency data for Mignon (1998) "if the efficiency hypothesis is rejected on daily data, it should be for weekly or monthly data". Similarly Alexander and Ertur (1994), show that if the information is not integrated at the end of the day, this is sufficient to reject the hypothesis of efficiency. Weekly and monthly periods would be in this longer-term effect adjustment qualitative price informational efficiency. International Journal of Commerce & Business Studies (O) 2347-2847 ISSN Volume-2, Issue-3, July-September, 2014, www.iaster.com (P) 2347-8276

We used BRVM composite index consisting of all securities listed on the BRVM, which gives it a more complete and comprehensive representation of the market. The advantage of using indices is based on the fact that, these indices measure the market performance and changes in these indices reflect market developments. It also allows comparisons. Studies done on African markets are mostly served time data on stock indices (eg , Appiah Kusi and Menyah ( 2003), Cheung (2001)).

Before performing statistical tests on the return series of the composite BRVM, several preliminary steps are necessary. We will first present the different models to be used in the empirical phase. In summary, we have highlighted four types of tests including: The unit root test , which allows us to check whether the return series of the BRVM composite index are stationary or not, the normality tests , which allow us to see if the distribution is normal or otherwise the existence of a possible heteroscedasticity in the series , then the ARCH test to confirm the existence of heteroscedasticity and finally the absence of serial correlation tests, to verify if the return series are dependent or independent . 3.1. Results of the Unit Root Test

Implementation of various homoscedasticity tests and self correlations requires that the series is first stationary to avoid false or spurious regressions. The Phillips Perron’s unit root test presented in Table1 below shows that the return series of the Composite BRVM is stationary at level with a probability of 0.0001 <1% and is also stationary in first differences. This test is particularly useful in financial series as it takes into account the auto correlation and possible presence of heteroscedasticity.

Table1 : Test de Phillips Perron sur les Rendements du BRVM Composite

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3.2. Results of Normality Tests

To reassure us of a possible presence of heteroscedasticity in this variable as well as to strengthen the sense that the variable is suitable to perform ARCH modeling, we examine its characteristics with a normality test.

3.2.1 Asymmetry and Leptokurticity

This is about comparing the series returns of BRVM composite index with a Gaussian process, from its mean, its variance and the skewness and kurtosis. The mean is close to zero and the student test validates the hypothesis of nullity of the mean. Analysis of skewness and kurtosis leads to the usual findings in studies of stock prices. The kurtosis is greater than 3 (206.4392), meaning a more flattened distribution than normal distribution. Furthermore, the skewness is not zero and is negative (-0.107618), which characterizes a negatively skewed distribution. Thus, the variable slows down a lot more than it rises.

Figure 2: Moments and Leptokurticity BVM Composite Returns

The analysis of leptokurticity (Figure 2) shows that the composite returns BRVM serie is not normal, but rather asymmetric with fat tails characterizing a leptokurtic distribution. This asymmetry may be indicative of the presence of non-linearity in the evolution process of the BRVM composite index. This heteroscedastic behavior cannot be taken into account by the linear constant variance (ARMA) processes. We note that the BRVM composite kurtosis is estimated at 206.4392, indicating a leptokurtic distribution, while the skewness is -0.107618, a value not very close to 0, suggesting an almost asymmetric distribution. We also know that when a series lends itself to an ARCH model, the unconditional variance must be independent of time. In other words, it must be weakly stationary. It is therefore important to perform the Kernel curve to check the leptokurtic distribution of the BRVM composite series returns.

Source: e-views5 Figure 3: Density RBRVM Composite

International Journal of Commerce & Business Studies (O) 2347-2847 ISSN Volume-2, Issue-3, July-September, 2014, www.iaster.com (P) 2347-8276

According to the density curve of figure 3, the RBVM composite serie is higher than that of a normal distribution. This finding confirms the leptokurticity already raised thanks to Kurtosis.

3.2.2. Test of Normality of Residuals

The Jarque-Bera test rejects the hypothesis of normality of residuals. Indeed, the p-value of the test is less than 1% (Figure 4). The errors of the model constitute a White noise non-Gaussian process that does not follow a normal distribution. The descriptive analysis above shows that the BRVM returns composite series is stationary, asymmetric, leptokurtic and negatively skewed. Also, the conditional variance of the process is time dependent, with a succession of small episode change and of high variation episode. It is therefore important to verify the actual presence of heteroscedasticity.

Source: E-Views 5.2 Figure 2.4: Normality of Residuals

3.3- Homoscedasticity Test: ARCH Test

To investigate whether there is certain dependence in the structure of the return series; we must first apply tests that have significant impacts that is the random walk model. As financial time series are often volatile, it is important for us to test for using the ARCH test.

Table 3: Results of Modeling the Generating Process of the Series

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The results show suitability of the chosen to describe the dynamics of stock returns process; the parameters are different from zero under the Student t test (5% level), the value of the likelihood function is 3620, 26. The estimated parameters are consistent with the hypothesis of stationarity of our series. The persistence of volatility is (20%). Indeed, the sum of the coefficients is 0.20 and thus less than unity. Also, the coefficients satisfy the constraint of positivity.

We start by examining the power of ARCH models in explaining the empirical conditional variance. Engle (1993) proposes a family of tests. The purpose of these tests is to check if the ARCH statistically captures significantly or not, the empirical data.

We discover that the null hypothesis of homoscedasticity is rejected in favor of heteroscedasticity because with a probability of 0.065.

3.4. Results of tests of no serial correlation and interpretations

The question here is to see whether the BRVM is weak form inefficient. To answer this question, we should investigate the presence of serial correlation in this model using the test of Box Pierce, the DurbinWatson test, the Breusch God-Frey test, and the BDS test (see tables after conclusion).

The results of Box Pierce tests allow us to confirm the absence of serial autocorrelation of residues. The chart shows a lack of serial correlation at 50 lags. Also the DW = 2.63 shows evidence of absence of autocorrelation.

Test corrected Box-Pierce highlights for the stock market composite RBRVM presence of serial correlation to a number greater than or equal to 50 lags. This result is more interesting when the number of lags considered is less than 50 at 10% level of significance. The Breusch Godfrey test of serial correlation shows evidence of presence of serial correlations in the residues.

This contradictory result may be explain by the fact that, the traditional models do not take into account the existence of the heteroskedasticity in the series, thus demonstrating the existence of a low form efficient on the regional stock market of Ivory coast.

In view of these results, it seems that the prediction of future returns from past returns is possible. Therefore, the regional stock market of Ivory Coast would be of inefficient weak form. To confirm the potential dependence highlighted by the corrected Box Pierce test, we will apply the BDS test to the series of stock returns. This test is considered as more powerful than the corrected Box-Pierce. The BDS test is useful in testing series that are independently identically distributed (iid), and secondly to detect the non-linear dependencies.

In order to verify the results obtained, we will use the tests that take into account the problem of heteroscedasticity (also called robust tests) in the series of BRVM composite index to search for more reliable results. This test is considered robust because it takes into account the presence of heteroscedasticity in the series of performance of BRVM Composite index in testing the serial correlation.

It appears from table 4 below that the assumption of dependence of stock returns is accepted because the probability is less zero at 1% significance level. According to the results, there is an obvious linear or non-linear dependence in stock returns at the BRVM. Thus, the return is not independently and identically distributed (iid). Returns are dependent and do not follow a random walk.

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Table 4: Test Result of BDS

Is Regional Exchange Securities efficient when it is inefficient of weak form?

Through the results obtained from the Box-Pierce test, Durbin Watson test and the Breusch and Godfrey (traditional tests) series returns reflects a lack of correlation and thus, the weak form efficiency hypothesis of BRVM is validated. We can explain the contradictory results obtained in testing the traditional model by the fact these traditional tests do not take into account the existence of heteroscedasticity in the series.

Therefore we can conclude that the market of the Regional Stock Exchange is inefficient of weak form. This confirms the initial hypothesis.

These results show that it is possible to speculate on the dependence of returns on the BRVM. They are consistent with findings from studies on the weak form efficiency test on the emergent stock markets of Africa. These results can be illustrated by the work of Appiah Kusi and Menyah (2003) who found that the equity markets of Kenya, Zimbabwe, Egypt, Morocco, and the islands are inefficient of weak Also, most studies from Kiweu (1991) show that emerging African stock markets have similar conclusions about their weak form inefficiency. This is justified by the fact that these emerging stock markets have the same characteristics.

CONCLUSION

Our study tried to determine whether the stock prices follow a random or if the BRVM works best if the return series exhibit serial correlation. To do this we hypothesized inefficiency of the stock market BRVM. Our tests show that the BRVM of Abidjan is inefficient of weak form.

International Journal of Commerce & Business Studies (O) 2347-2847 ISSN Volume-2, Issue-3, July-September, 2014, www.iaster.com (P) 2347-8276

Annexure

Table 5: Result of Box Pierce Test

Table 6 Statistics of simple Box-Pierce Lags 50 100 150 200 Statistics 60,234 80,567 130,678 300,098

Table7 : Corrected Box Pierce Test Statistics of Box-Pierce Lags 50 100 150 200 Probability 0,0235 0,02567 0,0345 0,056

Table 8: Test de Breusch-Godfrey

Breusch-Godfrey Serial Correlation LM Test Test:

F-statistic 0.360927 Probability 0.874218 Obs*R-Squared 0.670078 Probability 0.782913 International Journal of Commerce & Business Studies (O) 2347-2847 ISSN Volume-2, Issue-3, July-September, 2014, www.iaster.com (P) 2347-8276

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