Effect of Financial Risk on Unit Trust Price Volatility in Kenya

Abstract

The purpose of the study was to investigate the effect of financial risk on unit trust price volatility in Kenya. As a result of unit trust price volatility, investors are shifting to real estate and other investments with low price volatility, Unit trusts returns are trails below profitable bonds and equities traded at NSE and the sharp decline in the industry in 2007. This made unit trust price volatility an important issue for investigation. The study was guided by five objectives namely examine the: effect of liquidity risk on unit trust price volatility, effect of default risk on unit trust price volatility, effect of operational risk on unit trust price volatility, the effect of market risk on unit trust price volatility and effect of investment risk on unit trust price volatility in Kenya. A record survey sheet was used to collect secondary data using longitudinal research design. The statistical population of the study consisted of 19 Unit trust firms registered by CMA 2016 and offering money market and equity funds. Census was taken to collect annual data for a period of 9 years from 2009 to 2017.Data presentation was done using panel plots, trend lines and distribution tables. The statistical techniques used are descriptive statistics such as Mean, median and Standard deviation. Correlation test, analysis of variance and Panel regression analysis were also conducted for inferential statistics. The hypotheses of the study were tested using multiple regression analysis. The null hypotheses of the study were rejected significantly. The results of the study revealed that the effect of liquidity risk on unit trust price volatility was strong positive and statistically significant, effect of default risk on unit trust price volatility was strong positive and significant. The effect of operational risk was moderately positive and significant while the effect of market risk on unit trust price volatility was found to be weak negative and significant. The effect of Investment risk on unit trust price volatility was also negative and significant. The overall model was tested using the F-test. This implies that the models can be used for unit trust price volatility prediction though moderately. The null hypotheses for the three models in the research were rejected. The results of the study analysis revealed that all the independent variables had a statistically significant effect on unit trust price volatility in Kenya for money market fund model, equity fund model and combined model respectively. The independent variables contribute significantly in the changes of unit trust price volatility for money market fund, equity fund and combined model respectively. The study made the following recommendations; The Managers of collective investment scheme and capital market authority to increase awareness on existence of financial risk and its effect on Unit Trust Price Volatility. UT management to design internal risk policy as corrective measures to control information systems, reporting systems, internal management rules and internally acceptable procedures to govern operations. UT Management to make viable investment decisions in minimizing occurrence of numerous great profiling of financial failures in the firms’ economic development CMA management should ensure that all listed companies have operational websites to make this information public. CMA to tighten surveillance on Unit trust investment decisions and where the funds are invested to minimize collusion to swindle clueless investors. On policy implication, the government should review the CMA act to give the authority the inspection mandate on the unit trust to make them efficient and conform to financial international standards to be in line with the economic pillar of vision 2030. The unit trust should employ qualified personnel in financial matters.