Market Efficiency of the Ethiopia Commodity Exchange: The Case of Export Coffee Trading
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Date
2010-11
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Addis Ababa University
Abstract
Despite the pivotal role of agriculture in the Ethiopian economy, the sector’s development is
highly constrained by infrastructural and 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, forward-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 ADF, the Lo-MacKinlay variance ratio and the BDS tests
for random walk to study the price formation behavior of washed and unwashed export coffees
traded in the exchange for 16 months. The post estimation tests on the ADF regression showed
that ADF is inappropriate to use for the purpose for the study. The test for normality of
observations also showed that parametric tests for random walk are not appropriate to study
most of the prices series. The results from the non-parametric Variance Ratio and BDS tests,
however, consistently showed that there are both linear and non-linear dependencies in the price
series of both commodities and there is no observable trend towards efficiency. To further
strength the results, the Spearman’s Rank Correlation coefficient results have supported the
presence of a persistent and strong dependencies in the price series. The result thus entails that,
within the study period, ECX is weak-form inefficient and there is possibilities of taking trading
position that potentially offer traders excess profit using the predictability in the price series.
The result, however, is not surprising given the presence of price band limits, the infancy of the
Exchange and most importantly the nature of the trading (spot-based) in ECX. To address the
market efficiency problem and other crucial issues, the Exchange has to shift to futures based
trading. As such shifts cannot be made overnight, some measures are recommended that can be
implemented alongside the institutional development process in order to make the existing system
a more efficient one.
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Economic Policy Analysis