Testing the Existence of Low Price Effect on Stock Returns at the Nairobi Securities Exchange
Abstract
The low price effect simply purports that low priced shares
significantly outperform
high priced shares on a risk-adjusted return basis. The objective of
the study was to
test the existence of low price effect on stock returns at the N
SE. This study used
descriptive survey. The study used a census survey of all the comp
anies listed at the
NSE for a period of five years from 1/1/2009 to 31/12/2013. An annual review was
done at the beginning of each period for companies that satisfied a
s certain selection
criteria. The data included closing monthly value weighted average p
rices and
corporate actions. The firms were ranked according to their previous clos
ing prices
before the review period and divided into three equally weighted price
portfolios. The
monthly portfolio value was computed using share and cash investments
in each share
for the three portfolios. The portfolio returns were adjusted for risk using the
Sharpe
measure and tested using a nonparametric Wilcoxon signed rank test. T
he Wilcoxon
signed rank test results ranked low priced portfolio risk adjusted returns
higher than
both the moderate and high priced portfolio. However, high priced portfoli
o
outperformed the moderate priced portfolio. The test statistic from
Wilcoxon signed
rank test reported a significant difference between low and moderate
priced portfolio,
p<0.05 (p=0.043). The study concluded that the low price effect exist
s on stock
returns at the Nairobi Securities Exchange in the Kenyan Market.
Publisher
University of Nairobi