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ABSTRACT
In this study, the behaviour of stock market returns over time is investigated using Markovian analysis. It examines the Nigerian and Ghanaian Stock Exchanges for the period January 1, 2008 to December 2013. This is to be able to determine the behaviour of stock returns in these countries such that an investor will be able to out – perform the market and reap a windfall. The study adopted a secondary data sourcing from MSCI Barra Index. Using Markovian Chain model, standard statistical tests for homogeneity and order of the chain were applied. In addition, the hypothesis of stationarity and dependence in vector process Markov-Chain models was tested. Empirical results for the individual process and vector process Markov Chain confirmed heterogeneity in the chains. The result also show that the probability vectors cannot be used for the purpose of predicting the future estimate of the direction of stock price as it is random in nature. Thus, the Markov chain approach provides yet another evidence of the validity of Efficient Market Hypothesis and Random Walk Hypothesis. It is recommended that buying and selling of stock based on historical stock price in an attempt to out-perform the market will be in futility. Therefore passive investment strategy should be carried out by investors. With portfolio management, returns can be optimized in spite the randomness of stock prices. Also, efforts must be made by Stock Exchanges and Security and Exchange Commissions to instil and maintain discipline and corporate good governance in order not to undermine the integrity of the stock market more so that the cost of obtaining funds for long term investment by the quoted firms will increase because of the unpredictability of the market. The Central Banks and other appropriate agencies should also ensure enabling environment for quoted firms to thrive.
