Determinants of Stock Price Volatility; an Empirical Investigation of Nairobi Stock Exchange

Abstract

The study had the objective of establishing the level of volatility of stock prices in Kenya and identifying the determinants of stock price volatility. A sample of 16 companies in Nairobi Stock Exchange is examined for a period from 1998 to 2002. The empirical estimation is based on a cross-sectional multiple regression analysis of the relationship between stock price volatility as the dependent variable and earning volatility, payout ratio, long-term debt, size and growth in assets as the independent variable. The methodology adopted dictated the use of secondary data. Daily stock prices and annual financial reports were used in the study and analyzed using descriptive statistics and SPSS computer package. The results showed that all the five factors have influence on stock price volatility. Specifically, Stock price volatility was inversely related to payout ratio, earning volatility and growth in assets whereas it was positively related to long-term debt and size. Regression results confirmed that stock price volatility does exist at NSE and that it is not only a function of factors considered but also many more factors. This is because the explanatory power of the factors considered was low and that, the explanatory power of the model improved as the number of factor increase. We therefore conclude that the level of stock price volatility at NSE is high and that earning volatility, payout ratio, long-term debt size and growth in assets are not the only determinant of stock price volatility. Although the results are not robust enough as in the case of developed markets but are consistent with the behavior of emerging markets