"Time-varying Risk Premia" an Empirical Investigation on the Nairobi Stock Exchange

Abstract

In this study, the price of risk on the Nairobi stock market was estimated using a conditional asset pricing model that allows for time variation in the risk. Two different GARCH (1, 1)-M models are used in the econometric specification. The estimates of the price of risk are invariably positive and insignificant, and conclude that there exists an insignificant time-varying risk premium in the Nairobi stock market. The well known day of the week effect reflected in insignificant positive Friday and negative Monday, does not seem to be present in the market. Also entry of foreign investors and change of trading system increases volatility contrary to the fact the volatility should decline.