Stock Market Volatility At The Nairobi Securities Exchange

Herding is an important factor in determining equity returns during periods of price fluctuations in the market. Increased herding behaviour among investors as a result of uncertainty causes unnecessary volatility. Therefore, this paper investigates whether herding behaviour contributes to stock market volatility at the Nairobi Securities Exchanges (NSE). First, the study evaluates whether herding behaviour exists at the NSE and the extent of such behaviour. Secondly, it explores its attributed implication on the stock market indicators demonstrating volatility. The study has utilized monthly data from firms listed in the NSE from January 2009 to December 2015. Cross Sectional Standard Deviation (CSSD) has been mainly employed as testing methodology. Panel data on individual variables was used to estimate the non- linear model of both binary and continuous nature. Coefficients by the model have statistical significant influence on CSSD confirming the presence of significant herding patterns at the NSE which influence volatility as demonstrated in the graphical analysis and consequently firm performance. In order to have proper market stability which is appealing to retail and corporate investors, the findings suggest that stock market players including the government should critically consider providing both private and public information on retail and institutional investors. The government need to stabilize market prices to retain public confidence through provision of timely and accurate information of stock markets. Continuous herding behaviour by investors may spur unnecessary volatility which is likely to destabilise the market and increase the fragility of financial system especially in developing economies.