The Nigerian stock market came into existence in September 15th with the establishment of Lagos Stock Exchange which became operational in June 5, In December 5, , following the recommendation of the government financial system review committee of , the Lagos Stock Exchange was renamed and reconstituted into the Nigerian Stock Exchange.

The exchange has since then been the hub of the Nigerian capital market and has been operating through stock brokers or dealers who intermediate loanable funds between lenders and borrowers Nemedia, The Nigerian stock exchange which started with only 19 securities traded on its floors in now has over securities made up of government stocks, industrial loans, bonds and equities including SSM.

The SSM is the acronym for the second tiers securities market which was established in With it, the stock exchange relaxed the cost and listing requirement for the small and medium firms in order to assist small and medium sized indigenous companies to have access to the resources of the capital market.

The exchange maintains an all-share index formulation since January Only common stock ordinary shares are included in the computation of the index.

Deregulation of the Nigerian economy and hence the financial system in coupled with the privatization of the public sector enterprises in necessitated a lot of changes in the capital market. In view of this development, the Lagos Stock Exchange has since June 2, linked up with the Reuters electronic contributor system for online global dissemination of stock information like trading statistics, all share index, company investment ratios and company news.

In , the exchange launched its internet system CAPNET as one of the infrastructure supports for meeting the challenges of internationalization and achieving an enhanced service delivery. Since , there has been a decline in the share of government stock in the stock exchange.

The growth of government stock started decreasing while industrial equities and bonds as well as second tier securities market continued to increase yearly The Nigerian Stock Exchange, The internationalization of the market in accentuated the interest of the private sector investment in the stock market.

Conspicuously, as government stock traded in millions during to the recent day, industrial equities accelerated to billions The Nigerian Stock Exchange, Over the years, the total market capitalization has been increasing.

In spite of the progressive increase in the total market capitalization, its share of the gross domestic product has been very small. The proportion of market capitalization to Gross Domestic Product fluctuated between about 6.

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There was however a continued decline in its share of GDP from to and this decline could be associated with the widespread distress in the banking system within this period. In alone, a total of 26 banks including listed ones were put to liquidation Okpara, The random walk hypothesis states that the current market prices reflect all information contained in the record of past stock prices. This definition portrays that there is no regularities of patterns in security prices that repeat themselves over time as to predict future stock prices from past prices.

Consequently, investors cannot usurp any privileged information as to beat the market and make abnormal profit. The first to point out that security prices and prices of other speculative commodities follow a random walk was Bachellier His study was not recognized until Working confirmed the same result.

Since then, the weak form hypothesis has been tested in hundreds of studies. Fama , , Jennergren and Korsvold , Rom , Hadi and Raja et al. Few studies have been done on the efficiency of the Nigerian stock market. Samuels and Yacout were the first to conduct a test on the efficiency of the Nigerian stock market. Their result using weekly data for a sample of 21 quoted companies over the period to concluded that the Nigerian stock market exhibit a random walk Olowe, Ayadi , Olowe , Kukah et al.

Ayadi and Olowe also found that the Nigerian stock market exhibits a random walk hypothesis while Kukah et al. But their result of non parametric test contradicts the random walk hypothesis. The autoregressive conditional hetroscedasticity ARCH introduced by Engle and the generalized ARCH GARCH models introduced by Bollerslev will be employed to investigate the weak form efficiency condition of the Nigerian stock market.

The appeal of the GARCH 1, 1 model is that it allows for a time variant conditional variance and nonlinearities in generating mechanism.

Also, it captures both volatility clustering and unconditional return distribution with heavy tails Mala and Reddy, The GARCH model is based on the assumption that forecasts of time varying variance depend on the lagged variance of the asset.

The estimation of the model involves the estimation of two distinct specifications one for the conditional mean and the other for the conditional variance. The basic GARCH 1, 1 model can be expressed as: The closer the value is to 1, the high the persistence of volatility clustering.

The logarithm of relative prices P t , P t-1 multiplied by , that is lnP t -lnP t-1 is used to calculate continuous compounded monthly stock returns. The monthly returns of the quoted companies were analyzed using our GARCH 1, 1 model. The result of our analysis shows that the Nigerian stock market is weak form efficient.

This result agrees with the findings of Samuels and Yacout , who used serial correlation method on weekly share prices in Nigeria, Ayadi , who used nonparametric test on weekly price changes, Olewe employing sample autocorrelations on monthly stock prices and that of nonparametric test of Kukah et al. The results are shown in Table 1 with reported values in parenthesis as the standard error values. There is persistent volatility clustering in , and owing probably to the financial deregulation in , the privatization of public sectors in and the internationalization of the Nigerian capital market in Understanding the nature of stock market efficiency is important to the investors who seek to find whether the opportunity of making excess return does exist in a given stock market.

If a market is efficient, no arbitrage opportunities can be usurped to make excess profits as all the available information has been discounted in current prices.

In the light of this, this study investigated the issue of weak-form efficiency on the Nigerian stock market by employing the GARCH 1, 1 model on monthly price index. The result of the study shows that the Nigerian stock market follows a random walk and is therefore weakly efficient. The implication of this is that expectation about overvaluation or undervaluation of stock prices in the market is ruled out.

It is therefore a waste of time for investors to keep on studying and charting in search of the undervalued stock in the Nigerian stock market. However, it is worth noting that the findings revealed that the financial deregulation in , the privatization of the public sectors in and the internationalization of the Nigerian capital market in were associated in each of these years with persistent volatility clustering in the market suggesting the existence of weak form market inefficiency within these periods.

Other years portraying the market as weakly inefficient range from to with the exception of the year Of all these years, only has its vector of exogenous variable in the conditional mean equation significant. Thus, the Nigerian capital market is weak form efficient and does not concede the opportunity of making excess returns. Analysis of Weak-Form Efficiency on the Nigerian Stock Market: Further Evidence from GARCH Model.

This study investigated whether the Nigerian stock market from the period to follows a random walk. To carry out the investigation, the Generalized Autoregressive Conditional Hetrosecedasticity GARCH was employed. The result shows that the Nigerian stock market follows a random walk and is therefore weak form efficient.

However, the years , the period of financial deregulation, when some public companies were privatized, the period of internationalization of the Nigerian capital market and the years recorded persistent volatility clustering suggesting weak form inefficiency in the market for these years.

Nevertheless, the parameter estimates of their conditional mean equations except in were insignificant. Besides these years, other years were conspicuously and significantly found to exhibit weak form efficiency. Thus, the Nigerian stock market is weak form efficient and as such no investor can usurp any privileged information to bit the market and make abnormal profit. Related Articles in ASCI. Similar Articles in this Journal. Search in Google Scholar. How to cite this article: Okpara Godwin Chigozie , The International Journal of Applied Economics and Finance, 4: MATERIALS AND METHODS The autoregressive conditional hetroscedasticity ARCH introduced by Engle and the generalized ARCH GARCH models introduced by Bollerslev will be employed to investigate the weak form efficiency condition of the Nigerian stock market.

GARCH 1,1 model results of the Nigerian stock market monthly returns for the year The values in brackets are standard error values. The random walk hypothesis and the behaviour of share prices in Nigeria.

Efficiency across Time: Evidence from the Nigerian Stock Exchange - Munich Personal RePEc Archive

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