Testing Of Consistent Trends In Stock Performance In The Nairobi Securities Exchange.

ABSTRACT

This research set out to test for the presence of consistent stock performance as an anomaly in the Nairobi Securities Exchange (NSE) by employing monthly closing average stock price data that is balanced for 32 out of the 56 stocks listed in the NSE from years 2001 to 2010 as the sample. Frequency tests were employed to identify consistent stock trends, t-tests were employed to test significance of abnormal returns. Spearman rank correlation, standard deviation, range and proportionate runs metrics were employed to test volatility of stock prices. Runs test was employed to test serial correlation of stock returns. Simple regression equation is employed to measure the extent of cause effect relationship of market anomalies on consistent stock performance. Simple regression modeling was also employed to test the significance of the cause effect relationship of stock valuation on consistent stock performance. Multi-regression modeling was employed to test the significance that underlying company characteristics have on consistently performing stocks. The results indicate that there is weak evidence of consistent trends in stock performance in the NSE. The few consistently performing stocks in the NSE exhibited insignificant abnormal returns, no serial correlation and high stock price volatility except for consistent best performing stocks which displayed low stock price volatility. Consistent performing stocks are anomalous to some limited extent for momentum and seasonality. The results also indicated that the valuation of stocks had no influence on consistent stock performance. The results indicated that despite the multi-regression prediction model being a bad fit, there were some underlying firm characteristics with significant influence of consistent stock performance including: book value of stocks, dividend yield, market return and volume of stocks traded. These results indicate that there is insignificant presence of consistent stock performance which confirms that NSE is weak form efficient.