Dynamics of stock return volatility and leverage effect on share price returns at the Nairobi securities exchange in Kenya

Abstract

Stock return volatility has been a subject of interest among finance researchers and this due to the fact that volatility is that stock return volatility influences stock price movement. The study analyses the volatility in conditional stock returns at Nairobi Securities Exchange for the period 2ndJanuary 2010 to 31st December 2013. The study uses the Autorogressive conditional heteroscedastic – family econometric models to test for both the stock returns volatility and leverage effect at the Nairobi Securities Exchange. More specifically, the study focused on the main aspects of daily returns with special attention on volatility clustering and the leverage effect. More specifically autorogressive conditional heteroscedastic (1, 1) and Exponential generalized autorogressive conditional heteroscedastic were estimated. The study used secondary data of all the daily security prices from January 2010 to December 2013 and concluded that Nairobi Securities Exchange is not a weak – form efficient market. The study also confirms that volatility clustering is evident at the Nairobi securities exchange as portrayed by the significance of the coefficients of the autorogressive conditional heteroscedastic (1) terms. Lastly leverage effect was confirmed at the Nairobi securities exchange for the period under review implying the existence of information asymmetry in the market. Therefore, the stock returns and the market volatility are negatively related meaning that in the time of high market volatility, the bearish behaviour rules the market while in the time of low volatility bullish behaviour takes an upper hand in the market