An Empirical analysis of momentum in prices at the Nairobi Stock Exchange

Abstract

This study set out to determine the presence of momentum at the Nairobi Stock Exchange and the possibility of generating abnormal profits based on this anomaly. By examining whether momentum strategy employed on zero-cost portfolios for 3,6,9, and 12 month holding periods for a total of six years generates abnormal returns. The t-stastatistic is used to test the hypothesis. The results of the study show that stocks listed on the Nairobi Stock Exchange experience price continuation. Stocks experiencing a decline in their prices continue depreciating in price for a period not more than twelve months. On the other hand stocks experiencing price rise continue appreciating for a period not more than twelve months. Portfolios constructed on these stocks and held for periods of six, nine and twelve months indicate that momentum profits are present on the Nairobi Stock Exchange. However returns on portfolios held for three months give insignificant results. The implication for this study is that its possible to beat the Nairobi Stock Exchange market by investing in stocks whose prices have shown an appreciation in the short term and divesting from stocks whose prices have depreciated in the short term. From the findings of this study it could be inferred that the Nairobi Stock Exchange is not efficient hence the presence of the momentum anomaly.