Effect of firms’ market capitalization on stock market volatility of companies listed at the Nairobi securities exchange

Abstract

The main objective of this research paper was to analyze the relation between market capitalization and stock market volatility in the Nairobi Securities Exchange. Market capitalization is an important measure for investors in the determination of the returns on their investment. It is a universally acceptable metric for assessing the health of a publicly traded company and an estimate of the value of a business entity. Volatility, liquidity and business cycle dynamics across the cap classes were modeled by way of a regression model. The study analyzed the volatility in stock prices at Nairobi Securities Exchange, using data that span 5 financial years from January 2010 to December 2014. A descriptive survey design using quantitative data from secondary sources was applied in the research. The study combined the computational knowledge of volatility to draw patterns and concluded that market capitalization did affect the volatility of firms listed in the Nairobi Securities Exchange and that although there was a relationship, it was weak. The most significant factor that affected the stock market volatility of the listed firms was found to be market capitalization, followed by liquidity respectively. The study recommended that investors should consider liquidity and market capitalization in their volatility estimates and that the regulator should come up with laws that encourage trading by investors. The study however could neither acquire all the information of all the selected companies nor control for all the factors that affect stock price volatility. Further research should therefore be conducted in a different emerging market for comparison purposes, or within the same domain but controlling for more variables, with well defined market capitalization classes.