The relationship between trading volume and stock prices of firms quoted at the Nairobi securities exchange

Abstract

This study intended to examine the dynamic relationship between stock pnces and trading volume of firms listed at the NSE. In addition, the study reveals the nature and direction of this relationship. Trading volume is measure of the quantity of securities that change owners' hands in any given trading day at the Securities Exchange. Stock price represents the most recent price at which the stock last traded. The higher the volume the higher is the level of interest in the security at its prevailing price. The research design used was a correlation study and the population comprised of all the 58 firms listed at the NSE by December 31, 2012. The study covered the period 151 January, 2008 to 31st December, 2012. Secondary data for the period was collected from Mystocks, a company that does Real-time data streaming for NSE. The data for the population was first analyzed at the segmental level and thereafter for the combined 58 firms. Trading volume was measured by the weekly averages of the traded volumes and the stock returns by the weekly average percentage change in price. A regression model proposed by Lee and Rui (2002) was used to carry out the analysis in order to establish if a contemporaneous relationship exist between trading volume and stock prices. The overall coefficients of R2 and adjusted R2 were below 0.5 indicating that major variations of stock prices and trading volume were explained by other factors as opposed to the relationship between the two variables. It was concluded that a weak correlation exists between trading volume and stock prices of firms listed at the NSE as the overall coefficient of Correlation R was also below 0.5. The study recommended that it will be wise for financial managers, investment advisors and other policy makers to ensure that they pay very close attention to other factors especially fundamental, technical as well as prevailing market sentiments before making investment decisions. This would help to minimize poor investment decisions occasioned by mere observation of the movements in stock prices and trading volume of firms listed at the NSE.