BBSE Research projects (2016)

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An analysis of liquidity in stock markets
(Strathmore University, 2016) Muindi, Brenda Wanja
The following is a study on liquidity of the va rious stocks listed on the NSE. It has defined liquidity as the ability to trade large quantities of a stock without moving the price. The study seeks to determine the most liquid/ illiquid stocks listed on the NSE and the possible determinants of a given stock's liquidity/illiquidity. To determine the most liquid/illiquid stocks, the paper employs liquidity ratio as a measure of the stocks liquidity. The paper utilizes panel data regression and multiple regression to answer its research questions. The regressions were run using GRETL. The results suggest that Liquidity Ratio is an appropriate measure of liquidity in the NSE. The results also suggest that companies with high presence on social media as well as a high number of issued stocks tend to be more liquid. Keywords: Liquidity, Nairobi Securities Exchange
An analysis of the absorption capacity of Official Development Assistance in Kenya from 1981 - 2010 and its relationship with economic development
(Strathmore University, 2015-11) Kipchirchir, Lang'at Douglas
One of the key components of development funds for Kenya is Official Development Assistance (ODA). However, given ODA's general underwhelming nature and overall ineffectiveness in fostering economic development, it would be useful to consider absorption capacity as the best measure of how well aid to Kenya is working, and not just the gross amount of ODA flows to Kenya. That is the basis of this research. The research utilized time series data obtained from the World Bank aggregator, using a time period of 30 years i.e. 1981 to 2010. The dependent variable in this research is GDP growth rate, which indexes economic development. The absorptive capacity was found to display a mean reverting trend, with an average of 87% over the past 30 years. Thereafter, an Auto regressive Distributed Lag model was used to determine the long run relationship between ODA absorption and economic development. The results of the model showed that the absorptive capacity of ODA negatively influences economic development in the current time period, but it has a positive and significant influence on economic development in the next time period. However, in the long run, the relationship between the two variables is statistically insignificant, meaning that the relationship between the two cannot be determined to be a result of anything but mere chance.
Analysis of the macroeconomic determinants of a firm's capital structure
(Strathmore University, 2015-11) Waweru, Wangechi
This study analyses the relationship between macroeconomic factors and the capital structure of 55 listed companies in Kenya. The questions answered are what is the effect of macroeconomic conditions on capital structure and is there a difference in effects across segments? Panel data analysis is applied and a random effects model is used for the sample period 2004-2014. Fisher type unit root test is used to test for panel data stationarity. The segments analyzed in the research include; agricultural sector, manufacturing & allied, investment, banking, insurance, construction & allied, energy & petroleum, automobiles & accessories and commercial & services. The leverage ratios tested were debt to equity and total debt ratio. The independent variables tested were GDP, inflation, interest rates, exchange rates, asset tangibility and size. The findings of the study indicate that the macroeconomic determinants do not have an effect on the capital structure decisions of the listed firms as a whole. Results of the analysis of the different segments concluded that interest rate and inflation had an effect on the agricultural companies' capital structure decisions while interest rate, inflation and exchange rate had an effect on the energy and petroleum industries capital structure decisions. In conclusion none of the macroeconomic determinants affect the industry as a whole but interest rate, inflation and exchange rate are the macroeconomic determinants that are significant across the segments.
Analyzing the influence of twitter hashtags on the movement of the stock market
(Strathmore University, 2015-11) Muthoni, Warimah Joy
This paper evaluates the existence of a relationship between a well-known micro-blogging platform, Twitter and the financial market. We particularly consider in a period of six months the daily collection of trending twitter hash tags and the daily movement of the NSE 20 share index Granger causality, Correlation tests and logistic regression tests were used to examine the relationship. We find low Pearson correlation between the corresponding time series over the time period. We also found that none of the variables granger causes the other. We found no relationship between the sentiment as expressed from twitter and the movement of the stock market. As a series of other papers have already shown, there is a signal worth investigating which connects social media and market behavior. This opens the way, if not to forecasting, then at least to "now-casting" financial markets. This study is open to further and more advanced research using a longer time period as well and to employ sentiment classification techniques.
Assessing the impact of oil prices on exchange rate dynamics in the Kenyan economy
(Strathmore University, 2016) Chelimo, Winnie
This paper aims to investigate the role of murban adnoc oil import prices in explaining the dynamics of exchange rates in the Kenyan economy. The study uses monthly data covering the period 2005 to 2014. The Johansen Co-integration technique will be used to determine long run relationships of variables in the study.The vector autoregressive model is then used to analyse the regression by allowing the value of exchange rates to depend on more than just its own lags but also lags of lending interest rates and extemal reserves. The findings from this study show that in the Kenyan economy, murban adnoc oil import prices do not have a significant impact on exchange rates. Therefore, exchange rate stability could still be achieved even with fluctuating murban adnoc oil import prices in Kenya.
Assessing the optimal inflation rate for the Kenyan economy
(Strathmore University, 2) Auma, Laura
This study seeks to estimate the optimal level of inflation for the Kenyan economy that is favorable for its economic growth by using time-series dataset for the period 1981 to 2014. The study adopts a model proposed by Ademola & Aiwo (2006) to examine the existence of threshold level effects in the inflation-growth relationship. The estimated model suggests a 4 percent optimal level of inflation above which inflation retards economic growth.
A comparative study of the day of the week effect in the emerging and frontier markets in Africa
(Strathmore University, 2015-11) Waqo, Guyo Malicha
The study focuses on comparing the daily share prices of five major stock markets in Africa comprising of the emerging and frontier markets in Africa. The study uses daily share prices of stock market indices of Botswana, Kenya, Mauritius, Nigeria and South Africa over the period from October 20, 2014 to October 19, 2015. A regression based approach is employed to identify the existence of the day-of-the-week effect and the test of mean differences is used to compare the magnitude of the day of the week effect across the emerging and frontier markets. The results indicate that while all the African stock markets provide evidence of daily seasonality, the day-of-the-week effect is typically stronger in frontier markets. Specifically, a negative effect is observed for Monday while a positive effect occurs on Friday. The low level of observed daily seasonality in the stock markets of South Africa implies that the emerging market is weak form efficient, supporting the notion that the stock market development is accompanied by efficiency. The results have useful implications for international portfolio diversification. This may be of particular interest for the stock market authorities and the international investor.
Corporate debt bias in NSE listed companies in Kenya - evaluation of an ACE reform on investmentments levels
(Strathmore University, 2015-11) Kinyanjui, Mwangi Collins
This study looks at the corporate debt bias resulting from debt deductibility of interest. It aims at establishing whether an Allowance for Corporate Equity (ACE) tax reform within capital intensive firms listed on the NSE specifically the effect ACE would have on investments. Estimates used show that investments would grow up to five percent if the ACE was applied from the year 2004 for the selected firms. This growth supports the premise that the tax reform would eliminate investment distortions and encourage higher levels of investment.
Determinants of Commercial Bank profitability in Kenya
(Strathmore University, 2015-07) Kibiwot, Kiprop Collins
The purpose of this research is to examine the relationship between bank specific (internal) and macro-economic (external) determinants of banks profitability. This is done by using data of all the banks in Kenya from the year 2005-2010. The paper uses the method of pooled ordinary least square to investigate the impact of loans, deposits, assets, capital, GDP and inflation on two major profitability indicators i.e. Return on Assets (ROA) and Return on Equity (ROE). The empirical results have found that both the internal and external factors have a strong and 'significant impact on banks profitability. The results of the study are• valuable to both policy makers and academicians.
Determinants of Total Factor Productivity in Kenya
(Strathmore University, 2015-12-14) Kibet, Ray Reuben
Neoclassical growth accounting literature has shown that total factor productivity has a positive relationship with output. Based on OLS estimation techniques on data for Kenya between the years 2002 and 2013, this study finds that agglomeration economies, macroeconomic stability and political stability are good contributors of total factor productivity growth, which in turn leads to aggregate output growth. The findings of this study point to a shift from the notion that growth in National Income has to be stimulated by expansionary monetary spending. Other factors such as Population Density and attempts to stabilize the Macro economy can indirectly foster growth of National Income. Accordingly, the findings provide a basis for Policy makers' focus on Monetary Policy that keeps Inflation stable and the preservation of political stability and the absence of violence because this will lead to an increase in Total Factor Productivity and eventually National Output.
Determinants that influence financial performance of microfinance institutions in Kenya: case study of Nairobi County
(Strathmore University, 2015) Momanyi, Brigid Agnes
According to (Lafourcade, Isern, Brown, & Mwangi, 2005), microfinance institutions in Sub-Saharan Africa include a broad range of diverse and geographically dispersed institutions offering financial services to low income clients, non-governmental organizations, non-bank financial institutions, cooperatives, rural banks, savings and postal financial institutions and an increasing number of commercial banks. (Hartungi, 2007) States that microfinance institutions playa vital role in the economic development of many developing countries. He further mentions that they offer loans and technical assistance in business development to low income communities in developing countries. (Hoque, 2011), suggest that microfinance institutions offer a variety of products, which include: remittances and transfers, payment services, insurance services and other ' financial products or services that are not offered by commercial banks to low income clients.
The dynamic relationship between stock prices and exchange rates - A case of Kenya
(Strathmore University, 2015-11) Mumbe, Kaseka Anita
This study investigates the price t1uctuations and volatility spillover effects as well as the relationship between the stock market and the currency market in Kenya. The study developed long run and short run models for the exchange rate and stock price index with data ranging from between January 2004 to December 2014. The Data was obtained from the Nairobi Stock Exchange for the stock prices and the US DIKES exchange rate from the Central Bank of Kenya website. The study uses the Vector error correction model to determine the short run relationship 'and the significant price transmission effects' between the markets whereas the EGARCH' model is used to determine the volatility effects as well as the conditional variances of each of the variables. The study finds that there is no causal relationship between the stock market and exchange rate market; however it finds that there is significant volatility and price spillover effects from the foreign exchange market to the stock market and vice versa. This dynamic relationship opens up avenues for further research into other factors that may affect these two variables such as interest rates, which may be used to better explain the transmission of price spillovers between the currency and stock markets.
An Econometric analysis of the relationship between oil price change and inflation dynamics in Kenya
(Strathmore University, 2016) Macharia, Lucy W
The purpose of this study was to analyse the relat ionship between global oil price and inflation in Kenya. The specifi c objective of the study was to investigate the . impact of fluctuations of global oil price on Kenyan inflation. This study employed the use of monthly data for all the variables for the period 2005 to 2015, which was split into two: Pre-Energy Regulatory Commission (ERC) and Post-ERC. The study conducted Stationarity tests before using a Vector Autoregressive (VAR) model to estimate the data. The analysis showed that during the first sample period of 2005 to ,2010 (Pre-ERq, changes to the Brent price had no impact on inflation in Kenya. However, during the second sample period of 2011 to 2015 (Post-ERC), the Brent price was seen to impact inflation positively. This meant that any changes to the global price would result in an increase in local inflation, owing to the fact that the ERC derives local oil prices from the intemational oil prices . To mitigate this effect , the paper recommended that the ERC should take up more effective price controls.
The effect of an IPO on the share performance of industry rivals - an event study analysis of the Nairobi Securities Exchange
(Strathmore University, 2015-11) Waruru, Itugi Brian
The research project analyzes the impact an Initial Public Offering has on the share performance of industry rivals. Access to funds is one of the key processes of firms and an IPO is one of the channels that firms seeking better growth opportunities will pursue. In regard to the growing market of the Kenyan industry, more firms are expected to list at the Nairobi Securities Exchange and it will be of interest to study how an IPO will impact the share performance of an industry cluster. This research uses an event study approach to analyze the share performance of industry incumbents for the time period 2004 to 2014. The research finds that an, IPO has significant. Impact on the incumbents share performance and the significant effect is either negative or positive especially when the listing company offers similar services. This research also finds evidence that there is an insignificant impact when the listing company offers totally different services in comparison to the incumbents. The data is collected from the NSE as well as the websites of companies that have undergone an IPO.
The effect of inflation on stock returns and affirmation of the Fisherian hypotheses
(Strathmore University, 2015-12) Wachiuri, Wilson Wambugu
This study basically studies the long-run relationships as well as the dynamic interactions between inflation and stock returns in Kenya. Monthly data from the Nairobi Stock Exchange index and the Consumer Price Index is made use of while our sample period ranges from January 2005 to March 2014. The empirical technique of Autoregressive Distributed Lag (ARDL) bound test proposed by Perasan et al (200 1) was used. The results show that there exists a long-run relationship between stock returns and inflation. The short run dynamic model on the other hand exhibits a moderate speed of convergence to equilibrium implying that there exists •a short-run relationship between stock returns and inflation. This can perhaps be attributed to the instability of stocks evidenced over time.
The effect of interest rate changes on the stock market
(Strathmore University, 2016) Mugambi, Eric M.
The paper evaluates the existence and nature of the relationship between changes in interest rates and stock returns in Kenya with an aim to improve policy development and investment decision-making. This study uses the Central Bank Rate (CBR) as a representative of the . interest rates in the Kenyan economy and stock returns are used to represent the Kenyan stock market. This relationship is examined through the use of univariate and multivariate time series to determine stationarity and the long run and short run relationships respectively. All the variables used in this study are found to be stationary. The VAR model is used to determine the short run and long run dynamics of these variables and the results suggest that on the banking and the commercial sectors are affected by changing interest rates. The evaluation of a long' run .equilibrium relationship between changes in interest rates and the Kenyan stock market performance is found to be insignificant.
Effect of Working Capital Management on the profitability of Kenyan firms
(Strathmore University, 2015-11) Katola, Nashon Mulwa
This study seeks to provide empirical evidence about the impact of Working Capital Management (WCM) on the profitability of Kenyan listed firms. This is necessary since Working Capital Management affects both liquidity and profitability of firms and thus it is necessary for firm survival. A sample of 20 firms is chosen from five sectors of the NSE, based on market capitalization as at 2014. The study uses the fixed effects model in order to show the relationship between working capital management components and profitability and also show the effect of aggressiveness of working capital management strategies on profitability of firms listed in the Nairobi Securities Exchange. The study finds that individual working capita1 management components affect profitability but the effect is not significant to all sectors. Also, the relationship can either be negative or positive between different firms. Therefore, firm managers should employ proper working capital management strategies in order to yield the best results depending on what is best for them. An improvement in the firm's performance shall increase the firm value and eventually shall be of great importance to the shareholders of the company. Both the level of aggressiveness and conservativeness affect profitability of firms listed in the NSE. Therefore, firm managers should employ the best strategy for their firm in order to increase their profits.
Effectiveness of monetary policy on inflation targeting in Kenya
(Strathmore University, 2016) Mbuya, Warren W.
This study evaluates the feasibility of inflation targeting in Kenya by analyzing the effectiveness of monetary policy instruments in inflation targeting. The study uses a VAR analysis approach to assess the importance of the relationship between the monetary policy variables and inflation . Results show that the linkages between monetary policy instruments and inflation are not quite strong. Therefore Kenya ought to improve its monetary policy system in order to incorporate a fully-fledged inflation targeting framework within the economy.
The effects of interest rate spread on non-performing loans in commercial banks in Kenya.
(Strathmore University, 2015-11) Kiplangat, Cynthia Jemutai Talai
The main goal of any banking institution is to maintain profitable from its operations to ensure its sustainability and continued growth. Banks generate their profits mainly from providing loan facilities to its customers by charging them at competitive interest rates. However, the performance of the economy, especially at a time of recession, has seen customers default on their loan facilities. This has resulted in the existence of high levels of non-performing loans (NPLs) across the world since the 2008 financial crisis. High levels of NPLs have been evidenced to worsen the performance of commercial banks and have crippling effects on the economy. In Kenya, the level of NPLs has been evidenced to be growing in the last decade despite the efforts of the government to implement fiscal and monetary policies to stabilize the economy. This study seeks to determine how interest rate spreads as a micro-economic variable influence the level of NPLs in commercial banks, which translate to the total number of NPLs in the country. Keywords: Non-performing loans, interest rate spread
An empirical analysis of the predictability of stock returns using the Price Earnings Ratio and the Price - to - book Ratio - a case study of the Nairobi Stock Exchannge
(Strathmore University, 2015-11) Nduku, Kimundi Gillian
The purpose of this study is to establish whether the Return Performance of the Stocks listed on the Nairobi Stock Exchange is predictable using the Price Earnings Ratio and the Price-to-Book Ratio. The two multiples have been attested to provide a cross sectional explanation according to studies done by scholars ~n both developed, and emerging markets. The study mimics the approach used by Basu, 1977 (P /E), and Lakonishok et al, 1993 (P /B). The results found for the P /E Ratio suggest the ratio has weak predictability power of the Returns on the NSE. This is as compared to other studies in developed markets that have evidenced strong evidence on the dominance of value investing over growth investing. The P /B Ratio is however found to have conflicting effects on the returns in the NSE compared to empirical literature such that the high P /B stock portfolio evidenced a higher return over the low P /B stock portfolio.

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