Fixed effect modeling on how market value ratios affect stock price volatilities of firms listed in Kenya's stock market

Abstract

Most of the studies on stock price volatility have generally concentrated on macroeconomic variables and accounting ratios, but little has been done on market value ratios. Market value ratios are important for both investors and management as these ratios are used to decide whether the valuation of the shares are overvalued, undervalued or at par with the market. These ratios are used for making investment decisions in stocks of companies. It is therefore the main aim of the study to highlight some of the key factors that affects stock prices variability specifically for firms listed in Nairobi Security Exchange (Kenya's Stock Market). For purpose of forecasting and deep understanding of these factors, Fixed effect econometric model was estimated. This is because, fixed effect model is the most used model for panel data that addresses the issue of individual-specific factors that are unobserved and are heterogeneous which brings biasedness and inconsistences in a pooled OLS model. From the results market price book value, earnings per share, book value per share, dividend yield and institutional ownership of stocks significantly and negatively influenced stock prices volatilities.