Information efficiency of the Lusaka atock exchange and money supply in Zambia
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The purpose of this study is to determine the “informational efficiency of LuSE with respect to monetary policy and money supply. Capital market is said to be informationally efficient if the stock prices at any time “fully reflect” all available information regarding fundamental economic variables that include money supply. The main role of LuSE like any other capital market is to allocate scarce resources from savers to productive sectors of the economy. However, this role can best be performed if LuSE is informationally efficient. If LuSE is inefficient with respect to relevant information such as money supply, then this has important implications at both the micro and macro level. At micro level this implies an ability by certain individuals with the privileged information to earn consistently higher than normal rates of return, at the expense of those without “this privileged information”. At the macro level, it raises serious doubts about the ability of the capital market to perform its classical role of channelling funds to the most productive sectors of the economy. LuSE which opened for business on 21st February 1994 is a relatively new developing capital market which may not be informationally efficient. Therefore, there is need to determine the informational efficiency of LuSE empirically. The definitional statement that, “in an efficient capital market stock prices fully reflect available information” is so general that it has no empirically testable implications. To make the model testable, the informational efficiency of the LuSE is specified with respect to monetary policy. The money supply – stock market prices relationship has been widely tested. It is believed that money supply changes have important direct effects through portfolio changes and indirect effects through their effect on real economic variables such as GDP, consumption, investment, general price levels, earnings and so on, which are in turn postulated to be fundamental determinants of stock prices. This study tested information efficiency of the LuSE with respect to money supply by running a regression using the causality test model developed by Granger (1969) for the period January 1999 to December 2009. The analysis involved desk research using secondary data of M1, M2 and M3 of money supply from BOZ and composite stock prices index from LUSE on monthly and quarterly basis respectively using EVIEWS econometric package. The quantitative regression analysis using the OLS method was complemented by qualitative method through interviews. The dissertation addresses one research question: how efficiently do stock market participants at LuSE incorporate the information contained in money supply changes into stock prices? From the empirical findings, the null hypothesis that money supply does not cause stock prices at LuSE and the null hypothesis that stock prices do not cause money supply is accepted. This suggests that money supply and stock prices are determined independently. Since stock prices at LuSE do not “fully reflect” available information contained in money supply and probably in other fundamental economic variables, this suggests that LuSE is not informationally efficient. Since money supply does not Granger cause stock prices at LuSE, then past values of money supply does not contain information that helps to predict stock prices at LuSE above and beyond the information contained in past values of stock prices alone and vice-versa. Hence, stock market participants at LuSE do not incorporate the information contained in money supply changes into stock prices.