Analysis of Stock Return in Nairobi Securities Exchange Using Autoregressive Integrated Moving Average Model

Abstract

Nairobi Securities Exchange exhibited erratic performance ten years after the 2007 post-election violence. Investors, listed firms and the government had hard time in making investment decisions and policies given the volatility of Nairobi Securities Exchange during this period. This trend worsen in 2011 and 2015 when the burse experienced bear run leading to a loss of investors wealth in terms of market capitalization.  The Nairobi Securities Exchange 20 Share Index recorded high of 5,346 points during the first quarter of the year but dipped to 4,040 points in December 2015, representing 2.0 percent compared to December 2014. With observed volatility witnessed during the study period, analysis of stock return in Nairobi Securities Exchange using autoregressive integrated moving Average model is essential. The model output using ARIMA (p, d, q) will be used useful to managers, investors, investment analysts and policy makers. Using Autocorrelation functions and Partial Autocorrelation functions, the appropriate ARIMA (p, d q) model identified to be suitable for forecasting stock return is ARIMA (1, 1, 1) this is because the autocorrelation function drops sharply after p lags meaning the AR term exists and was be included.

Keywords:ARIMA, Investors, Stock Return, Partial Autocorrelation, Bear run, NSE-20 Share Index, Stock Return, Volatility

DOI: 10.7176/JAAS/71-04

Publication date: April 30^th 2021