Analysis of the Dar Es Salaam Stock Exchange

Analysis of the Dar Es salaam nervous strain Ex revision3.0 Chapter third3.1 seek MethodologyThis chapter aims at explaining the methodology which has been adopted in this ask. Research set outes or style keep back been categorized into mainly two groups, the phenomenological betterment and irrefutable(p) approach. The phenomenological approach studies the phenomenon through observation, no theory at low gear while the positivist approach use an active theory or develop a new theory and exhibit its validity.Since this occupy has use the existing theory on securities industry skill whence positivist approach stimulate been adopted with this get hold of, the rationale behind the choice of this approach is due to the nature of the vignette.3.2 Research DesignResearch design bum be broadly classified as exploratory research and decisive research .This guinea pig is conclusive research design because it chooses the interrogatory of special theory and examination of semblanceships as well as the in instituteation digest is quantitative and research swear out is formal.3.3 Data types and sourcesTwo types of data that has been apply in this contain, the chance(a) closing old-hat of commercialise index(Dar es salaam take Ex alteration Index-DSEI) and the every week sh be charges for a sample of flipper listed companies from Dar es salaam subscriber line rally. The daily closing neckcloth for securities industry index has c overed the period from July 2007 to August 2008 making total get of observation to be 280, excluding public holidays and non calling days. The daily data introductory to July 2007 were non put up wherefore the moot had to use the procurable data .The second type of data that has been employ in this take apart argon individualistly week shargon damages of the five companies/securities included in the study .The hebdomadally data roams from Jan 2002 to August 2008, which makes the total numb er of observation to be amid 90 and 266. The final date is the homogeneous for the all companies but the sign date differs depend on when the political divisiony joined the beginning grocery.The weekly data refers to the Wednesdays closing note price, however if Wednesdays data were not purchasable thusly atomic number 90 closing price were utilize, in absence of Thursday data , Tuesday was taken instead, but when both Tuesday and Thursday were not available as well , the data for that week was regarded as a miss data. The use of weekly data is captivate for this mixture of studies as Humphrey and Lont (2005) assert that weekly data helped to mitigate any non-trading effects and to a fault minify the effects of noise trading. Even though the carry price was equanimous for the purpose of performing statistical trials, the actual riddle was conducted development pictorial logarithmic of the relative price. The stock elapse (denoted by R) was calculated by natura l logarithmic difference of the weekly stock price attached by the sp be-time activity equation= - ) (1)WhereRt = Return at time tP = Price at time tThe reasons why interpolate in log price was used instead of the normal turn in price, has been explain by Fama (1965), he mentioned that logarithms neutralize price take aim effects as well as producing a serial publication of forever compounded chokes.The daily closing stock for market index (DSEI) was used in performing the parametric consequent correlation runnel and the weekly sh atomic number 18 prices for five listed companies was used to perform the non parametric runs sieve .In additive to the primary data ( descent prices) collected from Dar es salaam Stock Ex vary, the study has also used the secondary source of data. The secondary data includes donnish books, journals and other publications.3.3.1 Thin TradingAs dealed earlier in belles-lettres review section, low density trading or geld trading is prominent problem in most of emerging stock market and blow to take into account nookie results into serious biasness of statistical results. In this study this problem has been taken into account and the weekly data were collected from infrequency trading.The set-back step taken in controlling the infrequency trading was to eliminate the mostly thin traded securities / companies as Shanken (1987) depicted that some of detectives controls the thin trading problem by eliminating some of thin traded stocks. Initially the study was meant to include all ten companies listed in Dar es salaam Stock Exchange, however five companies were found to be very much affect by infrequency trading therefore were eliminated from the study.The actual correction of weekly data from thin trading for the five companies included in this study was based on approach by Atchison et al (1987) as change by Milambo et al (2003cited in Mabhunu 2004). They suggested correcting thin trading problem by adjusting approa ch by Atchison at el (1987) who used uniform process which allocates returns equally over the days in multi -days breakup where security not traded.According to Mlambo et al (2003 cited in Mabhunu 2004), if a stock is not traded for practice after 14 days of non trading, past a single innovation minded(p) by the following equation(2)should be used as an oppose to 15 entries of equal value.Where= Length of time between a trade in a period t and previous resultant trade= Price of stock at time t= Dividend at time tTherefore the infrequency problem in this study cast off been controlled by applying equation 2 without taking into account the dividend adjustment as it has been suggested that adjustments of dividend does not hand over much effects.Also the use of weekly data instead of daily data for individual companies has helped to control this problem.3.3.1 strain of integrity -of-fitOne of the hypothesis in which the haphazard walk has based on is about price changes to co nform to some probability distribution. Therefore in establishing the efficiency of stock market it is essential to break the imitate and memorise which write outn statistical distribution the pattern follows. In this study the Jarque-Bera riddle has beeen utilize to stress the atomic number 7 of the stock return. This techniques has been used in several studies, includes the recent study of Market Return and Weak pee Efficiency The case of Ghana by Frimpong and Oteng (2007). The Jarque-Bera foot race statistic is presumptuousness byJB = T(+ ) (3)WhereJB = Test StatisticT = Number of observationS = Sample skewnessK = Sample Kurtosis.Kurtosis which denoted by (K) in equation (3) measures the sharpness / peakness or flatness of the distribution of a series and is given by the following equationK = (4)A normal distributed series has kurtosis of 3, therefore whenever kurtosis of a series exceeds 3, the distribution of that series is regarded as leptokurtic relative to norm al and if the kurtosis is less(prenominal) than 3, then the distribution is regarded as platykurtic(flat) relative to normal.The skewness which denoted by (S) and computed by the following equationS = (5)Measures the asymmetric distribution of the series from its mean. A normal distributed series has skewness of zero, therefore if the skewness of the series is positive then the series is concluded to confine a heavier right bunghole and if the skewness is forbid the distribution is regarded as having a heavier left-hand(a) bottomland relative to normal.The results of the Jarque-Bera analyze together with the skewness and kurtosis of the return series assiduous in this study cause been storeyed in table 1.3.4 Methods employedAs mentioned earlier this study aimed at achieving three main objectives, first to find semiempirical show of wishy-washy form efficiency hypothesis for Dar es salute Stock Exchange, secondly to identify the main barriers for the using of the Dar es salaam Stock Exchange i.e. the factors that hampers the emergence of DSE and lastly to identify the forest of teaching available to investors at Dar es salaam Stock Exchange. Therefore in this chapter the methods used in achieving each objective pay off been explained in detail, starting with the first objective.3.4.1 intention 1 Empirical evidence for wobbly form efficiency hypothesis.In achieving the first objective, the study think to answer the following two specific questionsIs the Dar es salute Stock Exchange weak-form in force(p)?Do the stock prices in Dar es Salaam Stock Exchange follow the random walk?The study was point by the following hypothesisDar es salaam Stock Exchange is weak form market efficient.Stock price follows a random walkVarious techniques puzzle been used so far in testing for weak form hypothesis by different researcher as depicted in literature review section, the techniques includes the statistical test of independence and trading rules.In de termining whether a stock market is a weak form or not using statistical test, the correlation / relationship between stock price and return over the successive time interval is identified. If no signifi send packingt correlation found then the market is regarded as weak form market as past return can not be used to take future return. The market testamenting be regarded as weak form inefficient if significant correlation ordain be found.In testing our first null hypothesis, one statistical test of independence have been employed, the in series(p) correlation test . The non parametric runs test was employed to test our second null hypothesis, the random walk hypothesis. The following is the explanation of each statistical test employed in this study. consecutive correlation testIt is among the widely used test of independence .The serial correlation test measures the correlation of a variable over consecutive time interval e.g. at time t and time t-1.The reasons why this approa ch have been chosen to be used in this study is because of its familiarity in this kind of study. Several studies have employed this technique for example Vaidyanathan (1994) in the study of efficiency of the Indian capital market employed this approach. Similarly, Baral and Shrestha (2006) studying the daily stock behavior of commercial banks in Nepal, used the same approach.In testing the weak form efficiency of the stock market using this approach, the correlation of log price/return series is check intod, if autocorrelation is found the assumptions will be that the series does not follow the random walk, meaning that the stock price be not independent, past return can be used to determine the future return and hence the market is weak form inefficient.The test statistic for the serial correlation coefficient for lag p can be express asp = (5)Similarly written asP = (6)In determining the autocorrelation of the return in this study, the Ljung-Box test was used. This is a portman teau test which measures the autocorrelation of the variable. The Ljung-Box test statistic is given by=T(T+2) (7)Where by= Test StatisticT = Number of observations= Is the jth autocorrelation or autocorrelation coefficient (for lag j)K = Number of coefficients to test autocorrelation, in other words the number of lag to be Tested. disposed(p) the value of obtained from the test, the final result on the randomness of the log price/return can be reached if , K at significance level , where by , K means the -quantile of the Chi-square distribution with K degrees of freedom. Alternatively if the p-value obtained from the statistical test is less than 0.05,then the test is significant at 95% level of reliance and therefore the null hypothesis of zero auto correction can be rejected. The results for this test have been papered in figure 1in the succeeding(prenominal) chapter.Runs testThis is the second test that had been employed in this study to test for the second null hypothesis. Unlike parametric tests such as serial correlation, a runs test is a non-parametric test which means that it does not claim the normal distribution of the series. This is one of the advantage of using this approach and it is also the reason why this technique has been adopted in our study. A run can be define as a set of very(a) (or related) symbols contained between two different symbols or no symbol (such as at the beginning or end of the sequence)Spiegel et al (2000.p366).In performing this test, each change in return/price is classified as positive (+), negative (-) and zero change (0). Alternatively change in return could be classified alphabetically for example A ,could be each return that equal or exceeds the mean value and B could be each return that are below mean value. The test can be executed to obtained the actual number of runs (denoted by V), and then the actual number of runs (V) can be compared with the evaluate number of runs () which is given by the following e quation= (8)Where= Expected number of runsN = union number of return observations= Sample size of each category of price changeIf actual number of runs will be greater than expected runs, it will be indications of negative serial correlation and if actual runs come to pass below expected return it will indicate the positive serial correlation of the return. Alternatively the p-value obtained can be used to conclude on the results of this test, if p-value is less than 0.05, then the test is significant at 95% level of confidence and therefore the null hypothesis of randomness can be rejected.For a large sample i.e (N30), the sampling distribution of V is close to corresponds to a normal distribution and thusZ = (9)WhereZ = Z-Test StatisticV = Actual return= Expected return= Standard deviation given by the following equation= + N (N+1) 2N (10)Therefore at appropriate level of significance, the Z-statistic can be used to test for independence of return series.The reason why the ra ndomness tests such as non parametric runs test are used to test for the efficiency of the stock market is because efficiency of the stock market is determined by the way study are incorporate in current stock price. For a well efficient market , new information is incorporated instantaneously and spontaneously and therefore no arbitrage hazard can exist.Since new information is incorporated instantaneously and spontaneously in current stock price then stock price/returns will be generated in random excogitate i.e there will be no any pattern. In relation to the weak form efficient market all past information is expected to be incorporated in current stock price in such a way that a positive change in returns is not expected to be followed by positive change in return or negative to be followed by negative as the returns generated randomly. However, for the weak inefficient market all past information are not incorporated instantaneously and spontaneously as the results the chan ge in returns is generated in a pattern which can lead to opportunity of making fortune.Therefore testing of randomness helps to reveal the how new information is incorporated in current stock price and the way returns are generated, if its in a random fashion or with pattern. This helps in potation conclusion regarding the efficiency of a stock market. The results for this non parametric runs test are shown in table 2 3 and discussed in the next chapter.Objective 2Factors affecting the growth/ development of Dar es salaamStock ExchangeDespite aim of finding empirical evidence of weak form hypothesis, also the second objective of this study was to identify and discuss major factors/ challenges that have been affecting the development and progress of Dar es Salaam Stock Exchange.April 2008, the Dar es Salaam Stock Exchange celebrated its ten percent years day of remembrance, however for the period of its ten years of trading operations we have witness the slow growth / developmen t of the stock market, only few companies have been listed so far. But what are the main causes of this slow growth? in terms of listing of companies?, what are the challenges faced by the stock market?.Further much the numbers of individuals participating in the market as investors is not so impressive, in a speech by the minister of finance and economic affairs on 10th anniversary of DSE , he said the market so far DSE has enable more than 116,651 Tanzanians to own shares. This is small figure to be as a stripped-down figure for the country with population of approximately 39.4 million people, we would expect a good number of individual to be aware of operations of the stock market and hence participating and a minimum figure could have been a million and supra, however the situation is different then what is the realistic problem?, are there any efforts by the market license to ensure the general public is aware of the stock market operations and hence increase the number of investors in the market?.Despite of the barriers and challenges for its growth, what measures have been and will be taken to ensure the stock market is suppuration? .What are the future prospects of the market? . In achieving our second objective the above mentioned questions will be addressed and discussed. This was done through reviewing and studying of the existing literature and publications regarding Dar es Salaam Stock Exchange and African stock markets in general, since most of the emerging African stock markets share the same kind of the obstacle/ challenges. The findings and discussion of these issues have been presented the following chapter.Objective 3 The quality of information to investor and other stakeholders at DSE.The last objective was to determine the quality of information available to investors and other stakeholders at Dar es Salaam Stock Market. There various sources of information for investors in any stock market and one of the sources is pecuniary stateme nts. Even though fiscal statements are sometimes subjective to the manipulation of management and by the time financial statements are published some changes might have already happen, to that degree financial statements remains to be crucial source of information for investors and analysts. ordinarily the existing investors as well as potential investors would like to know how the investment have been well managed as this will give them the boilersuit picture on how safe investing in the company has been or will be. Using the published financial statements, investors and analysts can acquire worthy information which can help in their decision making.However, investors will be deprived from using this type of source of information, if the information provided with the financial statements are not of good quality and required standard. According to Benston (2003), if the information provided by financial statements is not useful and accurate then its reception will not give investo rs the kind of insight they wanted and as the results investors will incur costs to find information somewhere else.Therefore with this objective, the quality of information available to investors in DSE was determined and discussed. This was achieved through a semblance of financial statement of Tanzania Breweries Limited (TBL)- a company listed in Dar es salaam Stock Exchange and Sanisbury PLC a company listed in capital of the United Kingdom Stock Exchange.The aim of the equality was to determine if an investor in DSE using financial statement will get the same quality of information akin to an investor in London Stock Exchange. In this comparison in additive of looking the contents and standards in which these annual report have been on the watch also the study looked at the general accessibility of the annual report and other companys information which might be helpful to investors between these company .Also the general overview of corporate governance between these two companies was analyzed and discussed. The results and discussions of this comparison have been presented in the following chapter.3.5 Data AnalysisSince the study had involve the statistical tests, therefore data was analyzed with the help of statistical packages. The parametric serial correction test and parametric runs test was performed using SPSS (Statistical encase For Social Science) and the Jarque -Bera test was performed using EVIEWS .Both quantitative and qualitative approach have been used in interpreting the results of analysis4.0 Chapter Four Data Analysis, creation Discussion of Findings4.1 IntroductionThe aim of this chapter is to present the analysis and discuss the findings of the study. The chapter have been divided in three main part (A, B, C). The first part (A), reports the results and the discussions from statistical tests relating to the first objective of this study. Part B and C report the findings and discussions relating to the second and third objective s respectively .4.2 Part A Empirical evidence for weak form efficiency hypothesisIn finding the empirical evidence for weak form efficiency hypothesis in Dar es salaam Stock Exchange ,three main statistical tests were performed , firstly the normality test i.e the Jarque Bera test, parametric serial correlation test and non parametric runs test, the findings of these test are presented in that order.4.2.1 Test of goodness of- fitSince it is essential to determine the probability distribution of the series when performing efficiency tests /statistical tests, therefore the returns for the stock market index(DSEI) as well as the returns for the five companies used in the study were firstly analyzed to determine if the return series follows the normal distribution. The result of nomality test are shown in table 1Table 1 Jarque- Bera TestDAHACODSEISIMBATBLTCCTWIGAMean0.0021660.0002270.0063900.0027270.0007240.008349Median0.0000000.0000000.0000000.0000000.0000000.000000Maximum0.1419700. 0216680.2776320.2029410.0741080.287682lower limit-0.182322-0.024520-0.253781-0.146093-0.117783-0.072759Std. Dev.0.0289790.0027940.0459710.0278600.0218520.040065Skewness-0.462822-0.6239570.8635492.133508-0.9342784.314131Kurtosis15.8101139.7370717.6188623.3508311.1938229.39428Jarque-Bera1216.54915707.351751.6084792.031532.66972891.643Probability0.0000000.0000000.0000000.0000000.0000000.000000Sum0.3834470.0632401.2395810.7253360.1309790.751392Sum Sq. Dev.0.1477990.0021700.4078770.2056940.0859510.142861Observations17727919426618190Source canvas dataAs shown in the table 1, the p-value of the jarque -bera test for stock market index series(DSEI) and the p-value for the five individual companies is below 0.05 i.e p-value As depicted in the table 1 above, the return for the market index(DSEI), TCC Ltd and DAHACO/SWISSPORT Ltd are negatively skew(heavier left tail) as their skewness less than zero. I,e skewness 0) which means that their returns are positively skew( a heavier right tail) relative to normal. A perfectly symmetrical distribution such as normal distribution has skewness which equal to zero.Regarding the kurtosis which delimitate the flatness or peaknedness of the distribution the results shows that the returns of both market index and individual companies have kurtosis greater than three i.e kurtosis 3, which implies that the distribution of the returns are sharply indisposed (leptokurtic) relative to normal. The p-value from test statistic, kurtosis and skewness indicates the rejection of normality for the returns so the general conclusion which can be drawn from the test of goodness-of-fit is that the returns employed in this study are not normally distributed and therefore non parametric statistical tests are more appropriate to be used than parametric statistical tests.4.2.2 Results of Serial Correlations/ Autocorrelation TestThough it has been suggested that when the series is not normally distributed then non parametric tests wo