BBSE Research projects (2017)

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http://hdl.handle.net/11071/5372

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Stock market liquidity and asset returns: The case of the NSE 20 share index
(Strathmore University, 2017) Silvia, Wairimu Kahihu
This research aims to measure the liquidity levels on a sample of stocks from the Nairobi Securities exchange and also investigate the relationship between returns and liquidity on some of the stocks listed under the NSE 20-share index. The results show that there is a positive relationship between market illiquidity and returns which suggests that the excess returns contain a compensation for illiquidity. The measure of the illiquidity used in the study is the one proposed by Amihud in 2002 which is the average across stocks of the daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. The model that was used to test for this analysis is the random effects model after running the Hausman test.
A pension model for the Kenyan youth: use of airtime
(Strathmore University, 2017) Karanja, Melanie Nyawira
The objective of this project is three-fold: first, we develop a model that values a pension fund which uses mobile telephone airtime usage costs to accumulate the funds, with all costs associated with running a pension fund considered. Secondly, we develop two models that explain the difference in the accumulated pension fund value from the actual fund value. These models are: reduction in yield model and reduction in contribution model. Finally, we adjust the pension fund valuation model and the reporting models for lapse rates.
A study of behavioral biases present in sports betting markets
(Strathmore University, 2017) Warari, Jordan Kipkorir
This study seeks to establish the behavioral biases exhibited by individuals who participate in sports betting. The biases are manifested by how the individuals (bettors) analyze data pertaining the gamble in order to place their bet on the team that they think will win. The study was carried out using a questionnaire which was distributed to bettors which contained a variety of scenarios that were created to capture the behavioral biases. The data is then analyzed using a logit model. The study finds that the three most common biases exhibited by bettors are Representative bias, Anchoring bias and Favorite/Longshot Bias. In terms of gender, it was also established that the Favorite/Longshot Bias was exhibited more frequently amongst males than females, due to the different perception of risk between males and females.
Industry portfolios, information diffusion and the predictability of stock returns in Kenya
(Strathmore University, 2017) Obwora, Linda Abonyo
This paper tests the hypothesis that stock return predictability exists in the Kenyan market. In particular, it investigates whether in the presence of gradual information diffusion, which is as a result of investors’ limited information processing ability, lagged industry portfolios excess returns are able to predict the NSE 20 stock market index excess returns, which serves as a proxy for the entire stock market. Five market capitalization weighted industry portfolios, namely Agriculture, Financial Services, Commercial and Services, Manufacturing and Energy and Transport are constructed using stock returns from the year 2005 to 2015. The lagged industry portfolio expected returns, the market expected returns and the industry portfolio residuals (both lagged and for the current period) are fitted into an information diffusion model and thereafter the industry predictability and information diffusion coefficients are estimated using the Arellano-Bond GMM Estimator. The findings suggest that there is no causal relationship between the industries and the stock market and no gradual information diffusion. This implies that for the Kenyan stock market, there is no stock return predictability when the analysis is performed using the industry and wider stock market approach.
An assessment of the interest rate channel on monetary policy transmission in Kenya 2006-2015
(Strathmore University, 2017) Siele, Daisy Chepng'eno
For the government to achieve its desired level of economic growth, appropriate monetary policy needs to be formulated and implemented. Theoretical and empirical literature highlights the importance of the interest rate channel. However in Kenya there have been inconclusive evidence on the effectiveness of this channel. This study attempts to investigate the effectiveness of the interest rate channel of monetary policy transmission in Kenya during the period 1996-2015. The study employed Vector Autoregressive Models. The paper also employs time series techniques namely Unit root tests, cointegration, impulse responses and variance decomposition. Cointegration tests showed the presence of 2 cointegrating equations and the study proceeded to use Vector error correction models (VECM). From the impulse response tests, the interest rate channel of monetary policy is proved to be effective since the Central bank rate (CBR) is able to transmit effects on output and prices but its effectiveness is with the four lags for CPI and three lags for GDP. The forecast error variance decomposition show that in forecasting CPl, all fluctuations were attributed to itself, with decreasing significant contribution from CBR in the long run. Forecasting GDP showed that GDP fluctuations were greatly denominated by itself, however in the long run there was significant contribution in the other variables. The results show that the interest rate channel of monetary policy transmission is effective in Kenya.
Relationship between openness and inflation in Kenya: Testing Romer hypothesis using Autoregressive Distributive Lag
(Strathmore University, 2017) Mwangi, Catharine Wahu
Romer (1993) formulated the hypothesis that the relationship between inflation and openness is negative. The objectives of this paper are to determine if openness has any effect on inflation in Kenya and to establish the nature of the relationship between openness and inflation in Kenya. This paper contributes to the literature by examining the relationship between openness and inflation in Kenya by applying Autoregressive Distributed Lag (ARDL) to establish the long run relationship. The ADF test is conducted to determine the stationarity of the data while the ECT is used to determine the short run dynamics of the model and the deviation to equilibrium. . The other variables used in the study include: money supply, real interest rates and real GDP for the period of 1975- 2015. Based on the findings, there exist a negative relationship between inflation and openness in Kenya which supports the Romer (1993) hypothesis. However, this relationship is not significant. This implies that the closed economy explanation for the inflationary process remains valid.
The effect of stock price volatility on bank loan dynamics: a case of Kenya
(Strathmore University, 2017) Mwaura, Kenneth Ndung’u
The study seeks to evaluate dynamic linkages between stock prices and bank lending behavior prevalent in Kenya. As such the focal variables are loans to the private sector and share prices. However, because of the existence of common macroeconomic cyclical factors that may drive both variables, the study also uses other control variables i.e. price level (CPI), exchange rates and interest rates (interbank lending rates). The study employs the use of a VAR model with monthly data collected from the year 2005 to 2016. A unit root test and a cointegration test to check for stationarity and cointegration among variables respectively are also used. The findings are useful in explaining whether there is a causal relationship between adverse share price movement and bank lending in Kenya.
Stock market development and economic growth in African frontier markets
(Strathmore University, 2017) Njomo, Chelsie Wambui
There are three perspectives that have been used to explain the relationship between financial development and economic growth: the finance-led growth hypothesis, the growth driven finance hypothesis and the bi-directional relationship. As such, the casual relationship between stock market development and economic growth is still the subject of debate in research. This paper aims to address this topic in the context of African frontier markets. The Granger Causality test is applied to determine the direction of causality between stock market development and economic growth in African frontier markets using annual data from 1993-2014. These markets include: South Africa, Nigeria, Kenya, Mauritius and Morocco. The regression model is estimated using a panel Vector Error Correction Model. The Im, Pesaran and Shin test is conducted to determine the stationarity of the data while the Johansen Fisher test is used to determine the presence of co-integration among the variables. Based on the findings, there exists a long-run causal relationship running from stock market development to economic growth in the African frontier markets. This implies that stock market development promotes economic growth in these countries.
Construction of multidimensional poverty index of Kenya using the Alkire-Foster method
(Strathmore University, 2017) Mukui, Joy Wamaitha
In this paper, we use one specification of the Alkire-Foster approach, which is referred to as the Multidimensional Poverty Index (MPI), to calculate the poverty index of Kenya. This index was computed for 104 countries in Alkire and Santos (2010) and launched as a prominent feature of the annual United Nations Development Program (UNDP). Human Development Report, replacing the previous Human Poverty Index of the United Nations Development Program. The novelty of this paper is that it seeks to reconstruct the poverty index which is used in Kenya’s Revenue Allocation formula. Currently, the country is using a modification of Human Development Index as used by UNDP which gives weights to different aspects of deprivation, a method that has been dubbed as ‘Lucy’s model’, named after the person who developed it in December 2015, and was approved for use by the Commission for Revenue Allocation to distribute funds from the National government to county governments, by the National Assembly of Kenya on 10th March 2016. The paper compares the allocations arrived at by both Lucy’s Model and Alkire-Foster method in terms of equality of means, variances, correlations and other statistical tests of significance in differences between two or more data sets.
The influence of macroeconomic factors on the mortgage market in Kenya
(Strathmore University, 2017) Kamata, Marvin Ng’ang’a
The paper tries to study the relationship between the value of the mortgage market and key macroeconomic factors namely, Exchange rates, Inflation and GDP per capita. The real estate sector in the country is booming and is one of those industries that thrive in the country. As such, trying to further understand the factors that affect mortgages in the country is of great importance. After the model estimation, it is found that GDP per capita and exchange rates are significant in the model in explaining the variation in mortgage market value. It is also found that they have a positive relationship with mortgage market value. It is however found that inflation is not significant in the Kenyan context in explaining the variation in the mortgage market value.
An evaluation of entrepreneurship education as a tool used by the government to promote growth and development of SMEs in Kenya: A case study of the KPMG top 100 SMEs
(Strathmore University, 2017) Mukui, Pauline Njambi
The primary aim of this was to evaluate entrepreneurship education as a government policy tool, to stimulate growth and development of SMEs in Kenya. The SMEs considered for this study are all considered the best in their fields according to KPMG’s Top 100 SMEs. The study focused on owners or management of the SMEs selected. The study investigated whether entrepreneurship education had an effect on the performance of the selected KPMG Top 100 SMEs and subsequently their growth and development. The study made use of the data collected through the use of self-administered questionnaire in a survey. The data analysis included descriptive statistics and the T-test. Results showed a positive impact on the performance of SMEs in Kenya through the study of KPMG's Top 100 SMEs in 2015.It particularly improved entrepreneurship skills and knowledge of both the owners and managers of SMEs. The study indicated the extent to which entrepreneurship education plays in the growth and development of SMEs through highlighting the positive relationship between entrepreneurship education and growth and profitability of SMEs.
Firm-level determinants of liquidity: The case of NSE-listed Kenyan banks
(Strathmore University, 2017) Tim, Avedi Musungu
What are the key determinants of Liquidity in Kenyan Commercial banks? In the aftermath of the Global Financial Crisis as well as recent events in the Kenyan context, Liquidity and its management have been a crucial concern to industry thought leaders and policymakers. (Mwangi, 2014) and (Mugenyah, 2015) began the conversation in the Kenyan context. However, a more rigorous study is required to advance the debate and the current paper seeks to do just that. A panel data methodology is adopted with bank-fixed effects on a sample of 11 banks and 10 time periods. Two liquidity indicators serve as regressands and a set of core bank indicators as regressors. The author attempts to identify the 'best set' of core bank indicators that ultimately predict or determine liquidity in Kenyan Commercial Banks. Net Loans to Total Assets Ratio, Tier 1 Capital Ratio and Total Capital Ratio emerged as the most significant factors, highlighting the key role that bank specialization and Capital Adequacy play in the liquidity management function of listed Kenyan Commercial Banks.
Effects of election years in Kenya on performance of shares at the Nairobi securities exchange in Kenya: the mediating role of market
(Strathmore University, 2017) Njoroge, Michael Njiraini
The Efficient Market Hypothesis is a core theory which explain s how the securities markets work. Itv proposes that capital markets are efficient to varying degrees where in this context, the term efficient means that the price of a share reflects information that pertains to the company (Fama, 1969). There are two types of investors, those who can consistently make above average returns and the other, those who lose their money due to unfavorable movements in the market. According to (Fama, 1969) market players can 't earn an above average return on their investment from information trading as long as markets are efficient, where information trading is making investment decisions based on information acquired on various securities. This gives rise to phenomena which can't be explained by EMH. Examples are 'day of the week' effect and 'month of the year" effect which shows that on certain days, returns are lower than on others. (Gao 2005) shows that an investor making decisions based on such phenomena could very well earn abnormal returns
Healthcare expenditure and economic growth: The kenyan case (1970 - 2016).
(Strathmore University, 2017) Nyamweya, Naomi Kerubo
Given that a large chunk of the National Budget is allocated to the health care sector (31.3 Billion of the 2016/7 National Budget) it is important to establish whether it is of any consequence to output. There exists a gap in finding a link between total healthcare expenditure and economic growth in Kenya. This study seeks to establish and estimate the relationship between health care expenditure and economic growth for the period 1970 to 2016. The research design used here is historical and the data used is longitudinal. Secondary data on the GDP, total health care expenditure, gross capital formation, secondary school enrollment and labor force data is collected and following Solow (1956) an economic growth model was specified. The data is analyzed using EVIEWS software. The test for multicollinearity shows that education as the efficiency factor is highly correlated with the rest of the variables hence it is dropped from the model. The Johansen cointegration test results show that the variables are not cointegrated. An OLS Model is specified. It is found that healthcare expenditure IS positively and significantly related to economic growth as measured by real GDP.
Impact of single stock futures trading on stock market volatility
(Strathmore University, 2017) Karanja, Cindy Wangeci
This paper analyses the impact of trading single stock futures on stock market volatility. Specifically, it investigates the effect of trading single stock futures on individual stock return volatility. In addition, it aims to identify any presence of volatility feedback which is an asymmetric effect. This is based on an EGARCH model. The paper uses India stock market data on stocks from the information technology, banking, oil and gas and the consumer sectors. Eight stocks are chosen as result of ranking the stocks with single stock futures contracts based on market capitalization. First, the stocks are tested for ARCH effects which results into dropping the ITC stock. Individual EGARCH models are run followed by an extraction of the conditional volatility values. A regression is ran based on the stock returns against a dummy variable representing pre/post futures trading and the conditional volatility values. Subsequently, diagnostics tests are run for each of the EGARCH models. WIPRO displays the most conclusive results as a result of passing the model diagnostic test while the stock with the most inconclusive results was Tata Motors. Based on these results, it is evident that some of the stock returns volatility was affected by futures trading while for other stocks, there was an insignificant effect or no effect.
Impact of oil prices on the exchange rate in Kenya
(Strathmore University, 2017) Nyamunga, Pamella Achieng
The aim of this study is to estimate the impact of global oil prices on the exchange rate of Kenya for a monthly series from April 2000- April 2016. The modelling exercise follows 3 steps. In first step, the paper investigates the unit root test to check for stationarity in the individual variables. The second step is to run a diagnostic test to check for autocorrelation, normality and heteroscedasticity. In the third step, we estimate the equation for our model using OLS to determine its significance and the relationship between oil prices and exchange rate. The results are that oil price and exchange rate have an inverse relationship with the coefficient of oil having a negative sign. The paper goes ahead and runs GARCH test to get the conditional volatilities of exchange rate and oil price and after which a linear regression model was used estimate the relationship between the conditional volatilities of the two variables. The study then concludes that the conditional volatility between the two variables is significantly related. This implies that oil prices are a very vital variable in determining the strength of the currency and it’s volatility. The Kenyan Government should consider the impacts of oil prices when formulating and implementing economic policies, especially the exchange rate policies.
Forecasting equity prices for selected companies at the Nairobi Securities Exchange
(Strathmore University, 2017) Achieng’, Sandra Ochieng’
Information asymmetry is the main cause of uncertainty in security exchanges all over the world. There are “informed investors” and “uninformed investors” with the latter having imperfect information. Due to this uncertainty, investors have been trying to come up with ways of predicting stock prices and to find the right stocks and perfect timing for when to buy or sell. The primary target of this research is to construct a model that will forecast the short term stock prices for five selected companies listed in the Nairobi Securities Exchange divided into those that are highly traded, highly capitalized and highly volatile. Secondary datasets of returns on Kenyan stock market prices were retrieved from online sources such as the Nairobi Securities Exchange website and the Valuraha platform. The model employed in this paper took the form of an autoregressive integrated moving average (ARIMA). Results obtained revealed an impressive performance of the ARIMA model in stock price prediction especially when it came to the highly traded and highly capitalized stocks.
Hedging foreign exchange rate risk using currency futures: A case of Kenyan multinational firms
(Strathmore University, 2017) Mururu, Brenda Mwendwa
Currency futures contracts can be used in hedging exchange rate risk for firms. This study estimates the appropriate futures price that Kenyan multinational firms would have used during the year 2015 when the Kenya Shilling depreciated significantly relative to the US Dollar. The study also estimates the optimal hedge ratio for the two futures contracts based on simulated futures prices from historical exchange rates. The firms included in the sample are; NIC Bank, Britam, Equity Holdings, KCB Bank Group and Jubilee Holdings. The countries considered for the subsidiaries of these firms are Tanzania and Uganda. The results from the study reveal that the futures contract would have helped minimize the losses incurred by these firms during that period since the futures price at the beginning of the year is less than the spot exchange rate at the end of the year which the firms use to translate their financial statements. The hedging strategy using the futures contracts is also seen to be effective based on the R-squared values from the Ordinary Least Squares method used to obtain the optimal hedge ratios.
A Comparative Study of Crank-Nicolson scheme and Monte-Carlo Option Pricing
(Strathmore University, 2017) Musahara, Angel Herman
This study examines the rate of convergence and the accuracy of the two primary option pricing methods used currently by professionals; Monte-Carlo and Crank-Nicolson scheme using the Black-Scholes price as the benchmark price. We also introduce the Antithetic variates to the Monte Carlo, to check how much the technique improves the accuracy of the model. A model that converges faster and is accurate will be important in the valuation of large number of options, this will be beneficial to the current and potential investors dealing with large number of options, usually this is the case in practice. Similarly, by control variates technique, we can use our result to improve the accuracy of pricing options that do not have closed form solution such as American options or other exotic options.
On portfolio optimization: a case study based on the NSE
(Strathmore University, 2017) Kungu, Michael Ndichu
Diversification and active portfolio management have been suggested as means to enable investors obtain an optimal portfolio return with reduced risk exposure. Factor diversification has been proposed as a means to help explain this portfolio return. Both of this will help form the basis of this research. The aim of this study is to form an optimal portfolio whose return is expected to beat the market index, NSE All Share Index. The study will use the Carhart 4 factor model to classify securities into asset categories from which an optimal portfolio mix will be obtained. The risk-adjusted return to be used will be the Sharpe ratio and the Treynor ratio. This study will use data from the 48 listed securities at the NSE that were tradable during the period of 2007-2015. The study aims to build the knowledge of the portfolio investment in the NSE being a frontier market securities exchange and offer an investment strategy on the same.

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