Influence of Securities Behaviour on Performance of Nairobi Securities Exchange Indices

Abstract

This study aimed at establishing the influence of investor’s behaviour on the performance of Nairobi Securities Exchange (NSE) indices. A reliable security market index should assist investors in making investment decisions but this is not always the case: investors at times invest in stock whose performance is not reflected in the indices. This study was guided by specific objectives that included; to establish the influence of momentum effect, financial contagion effect, white noise effect, security price volatility, and market herding effect (all as independent variables) on performance of NSE indices as the dependent variable. This study was anchored to random walk theory, rational bubbles theory, smart money and noise trader’s theory, price formation and discovery theory, and information disclosure theories. The study was based on a period of 12 years starting from January 2004 to December 2015. The population of this study comprised of all firms (69) listed in the NSE and all the market participants licenced by the Capital Markets Authority (CMA) for secondary data and 20 licensed market participants for primary data. Secondary data was obtained from NSE, CMA and Kenya National Bureau of Statistics (KNBS). In data analysis, a significance level of 5% was used on all hypotheses and a multiple regression model on each objective was used. The Statistical Package for Social Sciences (SPSS) was used on primary and secondary data and excel spread sheets were used to prepare secondary data for analysis. The findings for primary data showed all the indices to be insignificantly influenced by the securities behaviour but the overall NSE indices performance was statistically affected. Hypotheses were tested at 0.05 level of significance. The first hypothesis on momentum effect was not rejected b on primary and but was rejected on secondary data analysis. The second hypothesis on financial contagion effect was rejected on both the primary and secondary data analysis. On the hypothesis of white noise effect, it was not rejected on primary data analysis but was rejected on secondary data analysis. The hypothesis of security price volatility effect was not rejected on primary data analysis. The hypothesis of market herding effect was rejected both on primary and secondary data analysis. In respect to momentum effect, the study concludes that just like what experts observed, there exists momentum effect on NSE indices. For financial contagion, though there were mixed reactions, the study concludes that financial contagion influences the performance of NSE indices. In the third objective of white noise effect, the researcher concludes that white noise influences the performance of NSE indices as was measured by the rational bubbles. For share price volatility, the conclusion is that it does not have a significant influence on performance of NSE indices though the most volatile firms are those in the FTSE NSE 25 being a composition of the most liquid firms in Kenya. It was finally concluded that all the indices play a complimentary role thus the need for the retention of all. NSE is highly contagious of the events that happen around it. The study recommends that future researchers should increase the respondents also include investors as well. The study would also recommend that in the future researchers, the research be conducted sector by sector basis instead of the entire exchange. This would help remove the smoothing elements that would distort the results. The researcher also recommends that future studies should look at other aspects of financial contagion since this study only looked at systematic contagion and only on the aspects of the international markets. The researcher would recommend to the NSE to ensure that data for the four indices is readily available and be cost free so as to encourage research. It was found some listed companies that didn’t have functional websites. This makes the researcher to recommend to the regulator, CMA, to ensure that all listed firms abide to the rules of free accessibility of their information.