Testing Weak Form of Market Efficiency of Exchange Traded Funds at the NSE Market

Cavin Oyugi Ongere^1, and Philip Ngare¹

¹School of Mathematics, University of Nairobi, Kenya

Cite this paper:
Cavin Oyugi Ongere and Philip Ngare. Testing Weak Form of Market Efficiency of Exchange Traded Funds at the NSE Market. Journal of Finance and Economics. 2020; 8(6):250-257. doi: 10.12691/jfe-8-6-3

Abstract

This study appreciates the importance of having a better understanding of the market efficiency when trading an Exchange Traded Fund of any given set of securities in an exchange market as it is extremely vital for any prospective investor who may be looking to make sound investment decisions as well as market trend predictions. When trading in a market with few traders who likes dominating the market through insider trading, it is more likely to experience securities exchange market without confidence of investors thus depicting weak form of efficient market efficiency. While testing of the weak form of efficient market hypothesis (EMH) of the Nairobi stock exchange (NSE) is done through daily as well as weekly index data from NSE 20 share index over the three months period. The research study applies the use of secondary data that was obtained from Nairobi Stock Exchange market website. This research has deviated from the normal and traditional linear approach to test market efficiency and use of using unit roots to test serial correlation. The daily returns in aspect to skewness and kurtosis was found to be non-normal. From the results, null hypothesis of normality was not rejected. In this study, there is the use of fractional integration thus utilization of ARFIMA to test long term memory and even the traditional unit root test is incorporated to compare both results thus giving a perfect conclusion on whether NSE stock market is definitely weak form efficient in the market. The NSE-20 share Index stocks are used to make an Exchange Traded Fund that is priced and forecasted. Ultimately, the forecasted values of ETF are done on the trend lines similar to the NSE-20 share Index trends, which helps investors to make informed financial decisions when buying any securities traded in NSE market.

Keywords:
MAPE ARFIMA NSE-20 share index EMH ETF weak form EMH

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