Abstract:
Despite the Kenyan government effort on the development of the Nairobi securities exchange market, the returns of the market have been volatile. Given the reviewed literature in this study, the study provides a four-fold problem with respect to how market microstructure dynamics affects equity market returns. It is not clear how market microstructure in the developing markets affects returns of such markets as Nairobi securities exchange market. Therefore this study aimed at filling the knowledge gap existing by enlightening individuals and mostly potential investors about the existence of the market dynamics and their consequent effects on the returns of the equities of the listed companies in the Nairobi Securities exchange market. The study aimed at establishing the effect of market microstructure dynamics on market returns of securities traded in Kenyan securities exchange market. The study used panel data analysis to evaluate specific objectives. These included: to evaluate the effect of trading volume, market resilience, market risk and trading activity on the market returns of equity securities in Kenya. The study used secondary data from all the firms listed in NSE during the period 2004 to 2016. The target population of the study consisted of the sixty four companies listed in Nairobi securities exchange market that is, both financial and non-financial companies. The study was a census study of all the sixtyfour companies listed in the Nairobi security exchange market for 13 years starting the year 2004 to the year 2016. The study started with descriptive statistics and then diagnostic tests. The measures of central tendency used to test normality were mean, median, maximum and minimum value, standard deviation, skewness and kurtosis. The results from these tests showed that the variables were fairly normally distributed. The study further sought to investigate the stationality properties of market returns, trading volume, trading activity, market risk and trading volume. The study used five panel data unit root tests. All the tests revealed that the variables were stationary on average. The cointegration results showed that there was long-run equilibrium. The regression techniques used was the DOLS (dynamic ordinary least square method). The regression results revealed that the variables had a statistically significant effect on market returns. Particularly, Market risk was found to have a reduction effect on market returns of stocks, trading activities on the other hand was also found to have a reduction effect on returns, market resiliency had a positive effect and trading volume had a positive effect on the market returns. It is therefore in this light that the future research should consider other variables which would increase the strength of the model.
