Simulation of the Nigerian Stock Exchange Using Hidden Markov Model

The recent global economic melt down has necessitated the development of models that can be used to study the long term behaviour of financial systems. Against this background, the Hidden Markov Model is presented to develop a simulation model of the Nigerian Stock Exchange. Real life data were collected from the daily stock market prices of the Nigerian Stock Exchange between the years 2005 and 2008. It is assumed that the hidden states are bull, bear and Even. These hidden states, along with the observable sequences of large rise, small rise, no change, large drop and small drop, were used to develop the Hidden Markov Model. A visualization of the model was carried out using graphical capabilities of excel. The visualization reveals that the stock exchange will only be steady periodically irrespective of initial conditions.