EFFECT OF VOLATILITY OF THE UNDERLYING SPOT MARKET ON DEPTH OF THE NASCENT KENYAN DERIVATIVES MARKET

Abstract

Derivatives market in Kenya is at its nascent stage which raises doubt on its depth in both
the short term and long term. NSE kicked off futures trading on 4th July 2019 which is
characterized by very low volumes, a clear indication of shallow market which is at its
nascent stage. The study identified single stock futures and equity index futures as the
instruments traded in derivatives market in Kenya. The study explored the effect of
volatility of the underlying spot market on the depth of the nascent derivative market in
Kenya. The study used Nairobi Security Exchange price list and contracts data ranging from
4th July 2018 to 31st January 2020. The study employed descriptive statistics and inferential
statistics namely granger causality tests, Johansen Cointegration and Autoregressive
distributed lags using Stata version 16. The results revealed that volatility of the underlying
spot market has a negative but statistically insignificant effect on single stock futures market
depth. However, volatility of the underlying spot market has a positive but statistically
insignificant effect on equity index futures market depth. The study concluded that at
nascent stage, volatility does not affect the derivatives market depth. Therefore, Capital
Markets Authority and Nairobi Security Exchange should focus on other factors that can
accelerate the derivatives market depth such as introduction of new derivatives products.