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Stochastic modelling in Financial markets: case study of the Nigerian Stock Market OMAR, Mahmoud Abdulsalam Taib Available from the Sheffield Hallam University Research Archive (SHURA) at: http://shura.shu.ac.uk/16847/ A Sheffield Hallam University thesis This thesis is protected by copyright which belongs to the author. The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the author. When referring to this work, full bibliographic details including the author, title, awarding institution and date of the thesis must be given. Please visit http://shura.shu.ac.uk/16847/ and http://shura.shu.ac.uk/information.html for further details about copyright and re-use permissions. Sheffield Haiiam University Learning and Information Services Adsetts Centre, City Campus Sheffield S1 1WO 102 078 532 2 •'laid Hallam University ,-,g and Information Services Adsetts Centre, City Campus Sheffield SI 1WD REFERENCE Stochastic Modelling in Financial Markets: Case Study of the Nigerian Stock Market Mahmoud Abdulsalam Taib Omar A thesis submitted in partial fulfilment of the requirements of Sheffield Hallam University For the degree of Doctor of Philosophy August 2012 DECLARATION I certify that the substance of this thesis has not been already submitted for any degree and is not currently being submitted for any other degree. I also certify that to the best of my knowledge any assistance received in preparing this thesis, and all sources used, have been acknowledged and referenced in this thesis. I ABSTRACT Stochastic Models in Financial Market Analysis: A Case Study of the Nigerian Stock Market (NSM) This research uses suitable stochastic models typically encountered in empirical and quantitative financial economics to analyse stock market data from the Nigerian Stock Market (NSM), in light of a) possible changes in the policy environments as result of the 2004 financial reforms by the then Governor of Central Bank of Nigeria, b) effects or otherwise of the 2008-09 global financial crises on the Nigerian financial system, and c) more technical issues underpinning performance of financial markets for example market efficiency, anomalies, bubbles, volatilities and their implications for investment decisions, stock market development and financial policy. There are substantial differences in the operation and characteristics of developed, emerging and pre-emerging (African) financial markets in terms of the above mentioned issues. Sometimes as part of general discussion of results we comment on the extent to which the characteristics of the NSM differ from known results in developed markets. A wide range of financial econometric methods and models including multivariate regression, Goodness of fit tests, Runs, Autocorrelation Function, Variance Ratio, Autoregressive tests, and discrete log logistic and GARCH-type models are applied. Both the All Share index and return data for 2000 to 2010 are used in this study. The time series data are divided into two periods namely pre-reforms (2000-2004) and post­ reforms (2005-2010). This study provides both investors and researchers in emerging African markets with a clear understanding of key financial characteristics of the NSM. Some useful results were obtained. Key characteristics of the NSM analysed in terms of market index prices and returns reveal evidence of market inefficiency and volatility. The data do not provide evidence of bubbles and anomalies in the NSM. This study, according to the author’s best knowledge, is possibly the most comprehensive combined study of crucial issues affecting the NSM including volatility, anomalies, bubbles and market efficiency. However, some other issues are excluded from the study because of the limitations of the data for example valuations and predictability, which are more suitably studied within specific companies and market sectors. II ACKNOWLEDGMENTS First and foremost, I thank the Almighty Allah for giving me the opportunity and the ability to accomplish this work. Without Allah’s help and guidance, I would not have reached to this point. I would like to express my deep gratitude and appreciation to my Director of Studies, Dr. Patrick Oseloka Ezepue, for his endless guidance and encouragement. I want also to extend my grateful thanks to my second supervisor, Dr. Kassim Mwitondi, for his suggestions and generous support, and to the staff in the Culture, Communication and Computing Research Institute (C3Ri), at Sheffield Hallam University for their help and cooperation. I would like to express my heartfelt thanks and gratitude to my dear parents, brothers, and sisters for their endless love, prayers, and encouragement. I am especially indebted to my uncle, Mohammed, for his unlimited support. I am also very grateful to my friends, especially Shukri Legwail, for his moral support and sincere friendship. Last, but not least, my deepest thanks and appreciation go to my wife, Seham, for her understanding, patience, and sacrifices. Without her love and support this dissertation will never be possible. Ill DEDICATION This dissertation is dedicated to My beloved mother and father, Fdela and Abdulsalam, My mother in law, Fatema My wonderful wife, Seham My lovely children: Mohammed, Abdulsalam, and Ayoub My Brothers and Sisters and All Altayeb's Family IV Table of Contents DECLARATION....................................................................................................................I ABSTRACT.......................................................................................................................... II ACKNOWLEDGMENTS.................................................................................................. Ill DEDICATION.....................................................................................................................IV List of Tables......................................................................................................................... X List of Figures...................................................................................................................XIII ABBREVIATIONS......................................................................................................... XIV 1 CHAPTER 1: INTRODUCTION..................................................................................1 1.1 Introduction.............................................................................................................. 1 1.2 Rationale for Research............................................................................................2 1.3 Rationale for choosing NSM as a case study:....................................................... 3 1.4 Brief Background on the Nigerian Financial System and Stock Market 4 1.5 Research Issues........................................................................................................ 5 1.5.1 Objectives of the research................................................................................5 1.6 Indicative Structure of the thesis:........................................................................... 6 2 CHAPTER 2: GENERAL BACKGROUND ON NIGERIAN FINANCIAL SYSTEM AND STOCK MARKET (NSM)........................................................................7 2.1 Introduction..............................................................................................................7 2.2 Characteristics of Emerging Markets.....................................................................8 2.3 Characteristics of African Stock Markets............................................................10 2.4 Background Information on the Nigerian Financial System and the Nigerian Stock Market (NSM)........................................................................................................12 2.4.1 The Nigerian Financial System Structure.....................................................12 2.4.2 Nigerian Stock Market: General Characteristics...........................................19 2.5 Recent Developments and Reforms in the Nigerian Financial System................24 2.6 Some notes on the importance of oil in Nigeria’s financial markets and economic growth..............................................................................................................31 2.7 Summary................................................................................................................32 3 CHAPTER 3: LITERATURE REVIEW....................................................................33 3.1 Introduction:.......................................................................................................... 33 3.2 Literature on Market Efficiency...........................................................................33 3.2.1 Perspectives on market efficiency.................................................................35 3.2.2 Specification of the information set and forms of the EMH....................... 38 3.3 Efficiency in emerging markets...........................................................................39 V 3.4 Literature on Market Anomalies.........................................................................41 J 3.5 Literature on Stock Market Volatility................................................................ 44 3.5.1 Emerging Stock Markets Volatility..............................................................45 3.6 Literature on Stock Market Bubbles.................................................................. 47
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