Determining the accuracy of the Nairobi stock exchange 20-share index
Abstract
The study set out to determine the accuracy of the Nairobi Stock Exchange (NSE) 20- .J
Share index. The need for the study emanated from the apparent weakness of the NSE
20- Share index to effectively report on the market performance as it is calculated using
unadjusted share prices and a geometric averaging method that has been statistically
proven to have a downward bias in the long run.
In addition, there is need for an alternative performance measure to give a balanced view
value movements in the NSE.
The derived indices were four in number: a Composite All-Share index, a 20-Share index
(Laspeyres method), a 20- Share index (Paasche method) and a 20-Share index (Fisher's
ideal method).
They all used 1996 week 14 as the base period and the base value was set at 3007.39,the
value of the NSE 20-Share index in the same period. This figure was selected to provide
for uniformity and enable comparison among the indices.
The share prices were adjusted for bonus issues throughout the period under study and
the number of shares in issue were used as the weights for all the indices derived.
During the four years under study, the N-SE 20-Share index was found to have
understated price rises by 1208%, rendering the index inaccurate and unsuitable for
measuring:lone-term rice movements. A more accurate index calculated using the
Fisher's Ideal formula was recommended for the Nairobi Stock Exchange as it proved to
able to effectively capture and report on market performance.
Citation
Masters of business administrationSponsorhip
University of NairobiPublisher
school of Business, University of Nairobi