The Dynamics of Stock Market Returns Volatility and Growth Rate of Listed Companies in Kenya
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Date
2025-06
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Kenyatta University
Abstract
Stock returns behavior affects the growth of firms' assets and hence their growth rates. Over time, companies listed under the Nairobi Securities Exchange have experienced an inconsistent trend in growth rates. Some companies keep issuing profit warnings to investors, and others result in delisting. In addition, the market has had a low number of new listings over the past 25 years. This raises some concerns about whether the listed companies are more exposed to risks associated with the stock market in Kenya. Based on the stock market environment, volatility of stock returns is among the motivators for companies to get high or low returns, and to get listed or get delisted. This study sought to determine the relationship between the volatility of stock returns and the growth rate of companies in Kenya. It outlined two specific objectives; to analyze the stock returns volatility's long-term behavior and determine their effect on the overall growth rate of total assets of listed companies in Kenya. The study used the maximum likelihood estimation method to analyze stock returns behavior, with the volatility models of the exponential generalized autoregressive heteroskedasticity and the generalized autoregressive heteroskedasticity. It then used the generalized method of moments to determine how the volatility of stock returns affects the growth rate of total assets. The stock returns data comprised 2,999 observations of daily stock returns, and the panel data comprised 1368 observations, from 19 listed companies between 2010 and 2023. Stock data was collected from the Wall Street Journal, while panel data was collected from the Wall Street Journal, and Africa Financials from companies' statements of financial positions. For the models’ validity, the study did the normality and ARCH-LM test on stock returns series and pooled ordinary least squares, fixed effects, and generalized method of moment models for the panel data, which helped to validate the use of a two-step generalized method of moment. Diagnostic tests were also conducted to avoid reporting spurious results: the auto-correlation test, Hansen’s test, and the joint significant test. The study found that stock returns over the study period were characterized by volatility clustering, persistence, and mean reversion behaviors but were not asymmetric. It also found that the volatility of stock returns adversely affected the growth rate of listed companies. The study therefore recommended that the government and other policymakers intervene in the stock market, with measures to attain significant asymmetric behavior. This will encourage investors and hence stock liquidity payout. This would give the listed companies easier access to more finance, reducing their financial risks in their attempt to grow their asset base.
Description
A Research Project Submitted to the Department of Econometrics and Statistics in the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for the Award of the Degree of Master of Economics (Econometrics) of Kenyatta University, June, 2025
Supervisor:
1. Angelica Njuguna