Effect of factor investing on stock returns at the Nairobi Securities Exchange in Kenya

Chakaya, Muhwa
Journal Title
Journal ISSN
Volume Title
Strathmore University
Factor investing is the investment process to gain selective exposure to factors which explain an asset’s risk and return. The purpose of this study was to establish the extent to which stock returns from factor investing were profitable at the Nairobi Securities Exchange. The two factors under study were value and momentum. The study used daily stock prices of large-capitalization stocks during the period January 2010 to December 2019. For each factor, three portfolios were formed: high (value and winning portfolio), low (growth and losing portfolio), and an intermediate portfolio. The stock returns from the factor portfolios were then analysed using descriptive statistics and regression analysis with the estimated parameters tested for significance. The study found out that factor investing was not profitable at the NSE: momentum factor earned positive returns albeit with mixed results while value factor and the combined factor portfolio lost money. The study also reported that stock returns from factor investing were highly cyclical: the stock returns exhibited high drawdown, long durations to prior peaks, and fluctuating returns in bull and bear markets. Finally, the studied showed that CAPM was a suitable model to explain the returns of long-only portfolios (value and winning), but ineffective in explaining the returns of long-short portfolios (value and momentum premium). A limitation of this study was its focus on large-capitalisation stocks. Prior studies focused on factors that explain stock returns at the NSE; therefore, this study added to knowledge the analysis of the profitability of stock returns from factors at the NSE.
A Thesis submitted in partial fulfillment of the requirement for the Degree of Master of Commerce at Strathmore University
Nairobi Securities Exchange-Kenya, Stock returns, CAPM