Original Research Article | OPEN ACCESS

Security Prices as Markov Processes: Some Evidence on the Random Character of Stock Prices in the Nigeria Bourse

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Received: 21 Feb. 2018        Accepted: 23 March 2018        Published: 31 March 2018

Citation: Security Prices as Markov Processes: Some Evidence on the Random Character of Stock Prices in the Nigeria Bourse. Account Tax Rev 2003; 2(1):136-151 doi:

© 2003 The authors.
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Abstract

This paper provides a method of Markovian analysis of security prices. In the study, we examine four securities selected from the finance and banking segment of the Nigerian bourse for a time frame ranging from January 4^th, 2005 to December 4^th, 2008. In our analysis, we define three possible states of nature (rise, drop, stable) with regards to security price change process within a modelled Markovian Framework. Our definition of the possible set of states allows both the magnitude and the direction of change to be incorporated into the analysis. The findings reveal that the Markov Chains did not provide a reliable prediction of security price movements for the period of our analysis. It is therefore recommended that we can only adopt the position that at best Markov Chains (for now) only helps to enrich our understanding of stock price behaviour, as far as the random walk hypothesis is concerned, even if the ultimate goal of prediction still proves difficult and elusive.

Keywords: Markov Chain, Markov Processes, Random Work, Stock Price Transition,