DOES MARKET INFORMATION RISK INFLUENCE PRICE DISCOVERY FOR STOCKS LISTED AT THE NAIROBI SECURITIES EXCHANGE?

Abstract

This study sought to determine the influence of market information risk on price discovery for stocks
listed at the Nairobi Securities Exchange. Price discovery for financial instruments trading in an
exchange remains a widely debated issue in the discipline of finance because of its implications for
risk management, portfolio construction, capital allocation, and promotion of societal welfare. This
study was guided by market microstructure theory and specifically information based models and
descriptive research design. The study population was based on all sixty companies whose stocks
trade at the Nairobi Securities Exchange for the period of six months using 60minute intraday data
during the continuous trading period. In answering the research question, the hypothesis was tested
using regression and correlation analysis. Analysis revealed that the mean value of price discovery
(WPC) indicator for the firms listed at the NSE was higher at interval one but had a decreasing trend
between interval one and interval three in general implying that there is greater price discovery
immediately after the market opened just before the continuous trading period. Furthermore, trend
analysis indicate that bid ask spread tend to be higher immediately following the opening of the
market and at the near close of the continuous trading period before post-closing auction takes
place. The study found a strong relationship between market information risk and price discovery
therefore supporting the hypothesis that market information risk significantly influence price
discovery of stocks listed at NSE. Based on the results of this study, the government through Capital
Markets Authority and other stakeholders should develop appropriate policies in an attempt to
design the securities market to enable market participants ease of access to information, enhance
information content of stock and improve the process of price evolution during trading.
Key words: Market Microstructure, Market Information Risk, Price Discovery, Stocks Listed at NSE