The behaviour of stock market returns in two West African capital markets: a markovian analysis

This paper examined the behaviour of stock market returns using the Markov Chains.It specifically aimed at examining the extent to which Markov Chains can be used to predict the behaviour of stock market returns in the Nigerian and Ghanaian equity markets. This research adopted a longitudinal survey research design and data about stock returns were collected at different points in time without any attempt on the part of the researcher to influence the data. The sample of the study is made up of two West African bourses. A census of the Morgan Stanley Capital International (MSCI) Barra aggregate stock market index for the Nigerian and Ghanaian stock market returns is used as a sample for the study. The study uses a Markov Chain model to test the random walk hypothesis of stock prices. A modified version of the chi square (U2 ) test statistics was run at 5% level of significance for the vector and individual process Markov Chains. The results show that stock returns are random and not in line with the direction in which the probability vector indicates. One possible explanation for this occurrence is that different companies are affected at different times by new information that could produce significant differences in the runs and in the large reversal patterns among daily stock prices. This paper recommends that efforts should be made by the Central Bank, Securities and Exchange Commission and other appropriate agencies to ensure that security prices should fully reflect all available information in the private or public domain