Prediction of Consistent Stock Performance and Low Stock Price Movement in Nairobi Securities Exchange Using underlying Firm Characteristics
Abstract
Stock markets that are efficient generate prices in a random manner which causes high
stock price movement or volatility. Low stock price movement implies consistent stock
performance and the existence of anomalies in stock markets that are efficient. There are
various types of consistent stock performance but the specific type that relates to low stock
price movement in the NSE and the relevant underlying variables are unknown and hence
the justification of the current research. The purposive sampling method was employed to
select a sample of 31 stocks from a population of 56 stocks that were listed in the NSE
during the study period from January 2001 to December 2010. The sample stocks were
initially sorted into three portfolios consisting of high, medium and low price volatility
stocks based on the standard deviation historical volatility metric. The portfolio with low
stock price volatility was then compared with the different types of consistent stock
performance in order to establish the specific type that was significantly associated with
historical stock price volatility. The low stock price volatility portfolio was regressed
against underlying firm characteristics to establish their prediction power. The results
indicated that consistent positive stock returns type was significantly associated with low
stock price volatility with Pearson’s correlation coefficient being 63.9% and p-value being
0.047 at 95% level of significance. Book value, dividends per share and earnings per share
predictor variables had significant prediction power over low stock price volatility and
consistent stock performance. The implication of these results is that investors in the NSE
can predict consistent stock positive stock returns and low stock price volatility by studying
underlying firm characteristics of book value, dividends per share and earnings per share.
stock price movement or volatility. Low stock price movement implies consistent stock
performance and the existence of anomalies in stock markets that are efficient. There are
various types of consistent stock performance but the specific type that relates to low stock
price movement in the NSE and the relevant underlying variables are unknown and hence
the justification of the current research. The purposive sampling method was employed to
select a sample of 31 stocks from a population of 56 stocks that were listed in the NSE
during the study period from January 2001 to December 2010. The sample stocks were
initially sorted into three portfolios consisting of high, medium and low price volatility
stocks based on the standard deviation historical volatility metric. The portfolio with low
stock price volatility was then compared with the different types of consistent stock
performance in order to establish the specific type that was significantly associated with
historical stock price volatility. The low stock price volatility portfolio was regressed
against underlying firm characteristics to establish their prediction power. The results
indicated that consistent positive stock returns type was significantly associated with low
stock price volatility with Pearson’s correlation coefficient being 63.9% and p-value being
0.047 at 95% level of significance. Book value, dividends per share and earnings per share
predictor variables had significant prediction power over low stock price volatility and
consistent stock performance. The implication of these results is that investors in the NSE
can predict consistent stock positive stock returns and low stock price volatility by studying
underlying firm characteristics of book value, dividends per share and earnings per share.
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