Profitability of filter rule test at Nairobi Stock Exchange, Kenya

Abstract

This paper examines the profitability of filter rule test in Nairobi Stock Exchange (NSE). There were no local studies on filter rule in Kenya and thus a lot of information was from the West. The population of the study was all the shares listed in the Nairobi Stock Exchange with a sample size of the companies that make up the NSE- 20 share index. The model used was from Fama and Blume (1960) theory of filter rule tests. The study systematically examined the returns of the various market segments and the share prices variability of the firms selected within the NSE for the various characteristics so as to build a basis for using FILTER RULE strategy. Finally it compared the results obtained from filter strategy with that of buy and hold technique to arrive at a conclusion. The study revealed that filter rule strategy exists in NSE. In keeping with the findings it was concluded that filter rule strategy in NSE is profitable at mean filter of 4.3% with the lowest level of 3.6% and highest filter level of 4.9%. The explanation prowess become stronger as we consider that the policy implication here is that market is not efficient and thus a shift in share price is in anticipation of future returns. Thus information is the key in to give the signal for an investor to go long or short at anyone time.