Market Efficiency of the Ethiopian Commodity Exchange: The Case of Export Coffee Trading
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Date
2010-11
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A.A.U
Abstract
Despite the pivotal role of agriculture in the Ethiopian economy, the sector’s developments is
Highly constrained by infrastructure institutional problems. To tackle part of the institutional problem. Spot –trading Ethiopia commodity exchange( ECX) was established with a vision to revolutionize the country’s agriculture through an efficient dynamic for ward – looking and orderly marketing system . This thesis is probably the first of its type to study the market efficiency of the ECX in trading its major commodity namely export coffee.
The efficient market hypothesis (EMH) is widely used in market efficiency studies . This thesis tested the weak form of EMH using the Lo-mackinlay variance ratio and the BDS tests for random walk to study the price formation behavior of washed and un washed export coffees traded in the exchange for 16 months. The post estimation tests on the ADF regression showed that ADF id in appropriate to use for the purpose for the study. The test for normality of observations also showed that parametric test for random walks are not appropriate to study most of the prices. The results from the non- parametric variance ratio and BDS
test for random walk to study the price formation behavior of washed and un washed export coffee
Traded in the exchange for 16 months .The post estimation tests on the ADF regression showed that
ADF is in appropriate to use for the purpose for the study. The test for normality of observation also showed that parametric test for random walk are not appropriate to study most of the price series s. The result s from the non- parametric variance ratio and BDS tests, however consistently showed that there are both liner and non- linear dependence in the price series of both commodities and there is no observation trend s efficiency , To further strengths the results, the Spearman ’rank correlation coefficient results have supported the presence of a persistent and strong dependencies in the prices series , the results thus entail that within the study period .ECX is weak-from inefficient and there is possibilities of taking treading position that potentially offer traders excess profit using the predictability in the price series
The results however ‘is not surprising given the presence of price band limits , the infancy of the exchange and most importantly the nature of the treading (spot- based ) in ECX .to address the market efficiency problem and other crucial issues the exchange has to shift to furthers based trading .As such shifts cannot overnight ;some measures are recommended that can be implemented the institutional development processes in order to make the existing system a more efficient one
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Keywords
Ethiopian Commodity Exchange, Export Coffee Trading