The Long-Run Prospect of Stock in the Nigerian Capital Market: A Markovian Analysis

Abstract

This study presents a method of Markovian analysis of the long-run prospects of security prices in Nigeria. It examines five securities randomly selected from the banking sector of the Nigerian Stock Exchange for the period spanning January 4^th 2005, to June 30^th 2008; and defines a set of three states (rise, drop and stable) for the process in terms of a Markovian framework. The findings suggest that price levels are likely to remain relatively stable in the long run irrespective of the current down turn of prices and global economic meltdown. It must however be noted that as is the case with every long range projection, the possible future occurrence is fraught with many probabilities (including chance events) and only time can prove whether the projections are valid or not. Nevertheless the technique provided here adds to the very rich, and often conflicting literature on stock price prediction or behaviour. It is therefore recommended that the techniquebe added to the very rich store of methods adopted by technicians (technical analyst) in evaluating and arriving at long range projections on the future prospect of stocks.

Keywords: Markov chains, fundamental analysis, technical analysis, stock price transition