The information content of the introduction of derivative trading at the Nairobi Securities Exchange

Abstract

This study sought to analyse the information content on derivatives trading announcement at the Nairobi Securities Exchange. The target population of the study were the companies traded in the NSE between 2012 and 2013 which were 56 companies; this is the event window that is before and after the announcement of the derivative trading in Kenya. The study used the all share index. Data was collected from secondary sources. Data on share price and Market value was collected from the NSE. Annual reports of the companies were obtained between 2012 and 2013 which is the study period. This study used the market model in order to analyse the determinants of the information content among companies listed at the NSE. The independent variables include prices of the shares before the introduction of derivatives. The study found out that as a result of the announcement there was increased liquidity in the capital markets and the prices of the assets and stocks were adequate. From the study findings the researcher can conclude that the announcement of derivates trading had adverse effects on the performance of NSE stock markets. The researcher also found out that on the announcement of derivates trading there was price discovery at the NSE. Most of the securities prices trading after the announcement of the derivates trading were affected by the basic supply and demand factors related to the market. On the announcement of derivatives trading improved liquidity among the investors and information asymmetries in the market place was reduced. This is true because the announcement of the derivates enhanced efficiency and increased liquidity in the new markets. The operation of futures markets or the information content and the introduction of derivative trading in stock markets have produced many important changes in the volatility of the markets and more particularly, in the volatility of the underlying asset. Results obtained prove the decrease in the level of volatility when the derivatives markets were proposed to be introduced as dummy variables. So, a net positive influence is observed from the trading of the derivatives introduction on index. The trading volume of the NSE 20 Share Index also increased on the proposed introduction of derivative markets and this effect appears even when the volume traded on the expirations days is removed. The introduction of derivatives does not represent a problem for the spot market because their impact is beneficial as seen in other countries which have introduced them. From the study findings the researcher recommends that the NSE should move with speed to introduce the use of derivates markets because this will not only be beneficial to the investors but also it will help in the growth and development of the economy. On the hand the NSE should introduce the derivates trading because they will go a long way in furnishing investors information content which is necessary in decision making in relation to the NSE trading activities. The researcher recommends that before the NSE introduces derivates trading it should carry out a researcher to ensure that the benefits to be achieved outweigh risks. From the work done further research can be considered on: Whether derivative trading can lead to companies listed at the NSE manage risks and reduce costs. A comparative study on the determinants of information content and its relationship with a firm`s performance as well as the impact of derivates trading on market volatility. The researcher also recommends a study on whether derivatives can bring about any turnaround in the capital markets operations, creating opportunities to the participants to realize optimal reward from their investments and to manage the associated risk effectively.