Extreme risk and the performance of firms listed in the Nairobi securities exchange

Abstract

The purpose of the study was to establish the relationship between extreme risk and the performance of firms listed at the Nairobi Securities Exchange. Extreme risk is a potential risk that is very unlikely to occur but that could have a significant impact on economic growth and assets returns, should it happen. During the period 2004 to 2015, Kenya experienced a spate of extreme events including the post-election violence which paralyzed operations at the NSE, effect of financial crisis experienced in Europe leading to mass exodus of foreign investors, several terrorism attacks among others. The study adopted a descriptive research design. The population comprised of the 62 firms listed at the NSE as at 31 December 2014. GEV and GDP distributions were used to model the extreme risk. The key finding of the study is that there is a positive and significant correlation between extreme risk and firm performance. However some counters, for instance Nation Media Group, are more prone to extreme risk than others. Such findings are critical to investors at the NSE since a carefully selected portfolio can minimize unsystematic risk. The study recommends further study as to why some counters are more adversely affected than others during the period of same extreme risk.