Effect of price volume momentum on stock returns at the Nairobi Securities Exchange

Thesis submitted in partial fulfillment for the requirements for the Degree of Master of Commerce (MCOM) at Strathmore UniversityThe purpose of the study was to examine the existence of price volume momentum. The period of study was between 2011 and 2016 and was divided into 2011-2013 and 2014-2016. The study also went further to analyze the behavior of trading volume and stock returns on a nonlinear basis. Finally, the study assessed perception of trading participants on price volume momentum. The existence of momentum returns was assessed using the Jegadeesh and Titman methodology in which portfolios were formed based on past returns as well as past volume. Momentum returns were measured as the difference between winner and loser portfolio for every holding period. From the analysis, momentum returns were found to exist at the NSE even though in the short run, three to six months. A bivariate momentum strategy that was formed using trading volume and returns was not found to report higher returns as compared to a univariate strategy. The relationship between trading volume and stock returns was tested using granger causality and impulse response. A nonlinear relationship was found to exist between trading volume and returns, with the relationship moving from returns to stock volume, with index returns being more responsive as compared to stock returns over the period of analysis. Lastly, the trading market participants had varying views as far as price and volume momentum is concerned. From the analysis, a lot of attention is paid to price momentum as compared to the volume momentum arguing that trading volume can be due to the disposition effect. The findings of this study indicate that investors stand a chance to make better returns when they buy into the winning stock and go short on the losing stock. However this can only happen in the short run, over a period of three to six months. Secondly, investment managers can use the findings of the second objective to advice investors since price-volume momentum has been traced at the bourse. Focusing on the trends in trading volume can help predict the future performance. For the market regulators the findings of this study are key as far as market efficiency is concerned. Momentum returns exist at the bourse even though in the short run, if compared to momentum returns reported in the developed markets which report momentum returns up to a period of five months. This implies that NSE is not efficient if compared to the developed markets. The study contributes to the existing knowledge on price volume momentum, where momentum returns have been found to exist in the short run three to six months, as well as the relationship between trading volume and stock returns, impulse response results indicate that even though the relationship between the variables moves from stock and NASI returns the effect is short lived up to five days after which no significant change is see