The Effect of Share Price Volatility on Stock Market Performance at the Nairobi Securities Exchange

Abstract

Share price volatility is the unavoidable market phenomenon that reflects on fundamentals of finance, information in the market and investor expectations. Share price volatility disturbs the proper operations of the financial system and negatively affects stock market performance. High volatility above a particular mark raises the investment’s risk profile hence possibility of losses are paramount. This phenomenon raises concerns over market confidence and the general condition of the economy. This research paper sought to examine the effect of share price volatility on stock market performance at the Nairobi Securities Exchange. This study explored the Efficient Markets Hypothesis and the two pricing theories; APT and CAPM. This research paper adopted a descriptive research design targeting the twenty companies that form the NSE-20 share index at the Kenyan exchange as at the end of 2015. The study used secondary data, which covered a ten-year period: 2006 – 2015. The data collected was analysed using the Karl Pearson correlation and multiple linear regression using the statistical package; SPSS version 23. The study findings indicate that share price volatility and interest rates negatively affect stock market performance while rates of interest and supply of money positively impact the performance of the stock exchange. The study also revealed an insignificant effect on share price volatility and stock market performance but a significant effect on rates of interests, the supply of money and economic growth. The study concluded that share price volatility negatively affects stock market performance such that an increase in share price volatility reduces stock market returns. The study recommended that policy institutions like the Capital Markets Authority of Kenya should develop effective policies on share trading rules to reduce high share volatility.