Why Is the Effciency of African Markets Decribed as Weak?

Topics: Stock market, Stock exchange, Fundamental analysis Pages: 6 (1560 words) Published: December 26, 2012
About two-thirds of African stock markets emerged in the late 1980s and early 1990s. The latest arrival is the Douala Stock Exchange in Cameroon, which was established in 2003, making it the youngest stock market on the African continent.

Most of these markets were formed at the instigation of government to act as vehicles to privatize state-owned enterprises (Mlambo, Biekpe, 2001; Moss, 2004).

African stock exchanges are also the smallest in the world in terms of both number of listed stocks and market capitalization. They are also small relative to their economies, with the market capitalization of the Nigerian Stock Exchange only representing 8 percent of gross national product (GNP), while in the case of Zimbabwe, Kenya and Ghana, the market capitalizations ranged from 25 percent to 35 percent of GNP (Kenny and Moss, 1998). The largest African stock market in terms of market capitalization is the Johannesburg Stock Exchange

The majority of stock markets in Africa trade daily, from Monday to Friday (Sunday to Thursday in Egypt), except for a few such as Ghana, Tanzania, and Uganda, which, in 2002 were trading three times a week. Ghana was trading on Monday, Wednesday and Friday, while Tanzania and Uganda were trading on Tuesday, Wednesday and Thursday Trading times also vary, ranging from one hour per trading day in Tanzania to the whole business day in Zimbabwe.

For a stock market to be efficient, movements in prices of the market’s underlying securities must be characterized by a random walk based on currently available information. From Fama [1970], the strong form of the efficient markets hypothesis states that an equity market efficiently converts all information into accurate security prices such that no information of any kind, public or private, will help investors achieve superior returns.

The weak form of the efficient markets hypothesis states that past stock market information is irrelevant for predicting future movements in stock prices. Technical analysts are concerned only with the price movements of securities.

Unlike fundamental analysts, they do not care about the characteristics of the company that has issued the security. They follow trends in a security's supply and demand, as shown on price charts, to choose the most profitable times to buy and sell. .

African stock markets face a number of challenges which explains their weak form of efficiency. These include: 1. Lack of effective educational campaign
2. Lack of national awareness
3. Poor patronage in the market
6. Poor capitalization of brokerage firms
7. Low number of listed firms
8. Poor performance of most listed firms
8. General economic climate

There is lack of awareness because there are usually no educational program packaged with the establishment of such markets, which are entirely new to the people.

There is poor patronage because incomes are quite low for a high percentage of the population. Poor capitalization can be solved by having the brokerage firms go public.

The low number of listings is usually tackled by governments introducing incentives such as lower tax rates to listed firms. In an environment such as Ghana’s, lack of knowledge and unfamiliarity with negotiable instruments by the populace are expected to be significant constraint to the development of the securities markets.

A study found that the short courses the Ghana Stock Exchange runs on a continuing basis throughout the year are helping to educate the participants about securities. There are five such courses, designed to meet the needs of both professionals and non-professionals on various aspects of the securities industry that are conducted about every other month.

There is need for other institutions, such as the universities, banks, brokerage...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Why are African states weak Essay
  • Empirical Evidence of Weak Form Stock Market Efficiency Research Paper
  • weak Essay
  • Reasons Why the Stock Market Crashed Essay
  • The Weak-Form Efficiency of The GCC Markets Essay
  • Market Essay
  • why do market fail Essay
  • market Essay

Become a StudyMode Member

Sign Up - It's Free