Effect of Trading Activity on Stock Return Volatility for Stocks Listed at the Nairobi Stock Exchange

Abstract

The objective of the study was to examine the effect of trading activity on stock return volatility for stocks listed at the Nairobi Stock Exchange. The specific objectives were to determine the effects of trading volume and trade size on stock return volatility from 2013- 2018. The study was based on the Efficient Market Hypothesis, Modern Portfolio Theory and Prospect Theory. A descriptive cross-sectional research was used to conduct this study which targeted 63 stocks listed at the NSE. Non-probability sampling was adopted where convenience sampling was used to select stocks listed at NSE in the period 2013-2018 due to the proximity and accessibility of the 57 companies’ data to the researcher. Secondary data was used and was extracted from the NSE website and financial statements of sampled firms and tabulated into a data entry sheet covering the study period. Diagnostic tests which included checking heteroscedasticity, normality, and multicollinearity were conducted. Descriptive and inferential statistics were used to analyze the data which consisted of correlation and multiple regression analysis. The findings revealed that trading activity was a factor that significantly affected stock return volatility. The regression coefficients indicated that trading volume and trade size had a positive and negative significant effects on stock return volatility respectively. The study concluded that an increase in trading volume at the NSE resulted in increased stock return volatility and that an increase in trade size at the NSE resulted in reduction in stock return volatility. The study recommends that the Capital Markets Authority, Nairobi Securities Exchange and policy makers in the financial markets should urge stockbrokers to advise their clients against being overconfident when trading in stocks.