Determinants of stock returns volatility of firms listed on the Nairobi Securities Exchange: moderated by trading volumes

Abstract

This study aimed at identifying the determinants of stock returns volatility. This study investigated the macroeconomic and firm-specific factors as determinants of share returns volatility of companies listed at the Nairobi Stock Exchange. The study focused on the sixty-two companies listed on the Nairobi Stock Exchange. Stock returns volatility is believed to be affected by some prime external environmental factors. The study was motivated by the dynamic and changing macroeconomic environment in Kenya. The study sought to investigate the unique firm characteristics that lead to the stock returns volatility. The study investigated GDP, inflation, interest rates and exchange rates as macroeconomic factors. It also investigated firm size, leverage, earning per share and dividend payout as the firm specific factors. The study also considered trading volume as a moderating factor ,liquidity and price earnings ratio as control variables. The study was grounded on the APT theory, signaling theory, MDH and SIAH theories. The investigation used descriptive correctional research design . The results confirmed the sensitivity of financial markets to changes in the broader economic environment. Inflation and GDP, however, showed inconsistent effects, suggesting that not all macroeconomic indicators are equally predominant in the short term. In addition, firm-specific factors such as financial leverage, firm size, liquidity, dividend payout and earnings per share were also important in explaining volatility patterns across companies. The moderating role of trading volume was validated. Higher trading volumes intensified the impact of certain macroeconomic and firm-specific factors on volatility. This suggested that investor activity and information flow amplify price reactions to shocks. This reflects the behavioral finance where market reactions are not only by fundamentals but also by market participation levels. The research findings are of significance to investors, investment managers, management of the listed companies and policy makers such as the government.