THE IMPACT OF DERIVATIVES IN THE NAIROBI STOCK EXCHANGE: IS CORPORATE KENYA READY?

ABSTRACT

This article examines the impact of introduction of financial derivatives trading on the volatility
of Nairobi Stock Exchange (a developing stock market). It examines the theme that the
introduction of derivatives in the stock market in Kenya would reduce the volatility (risk) in the
stock market. NSE 20 index has been used as a proxy of stock market return. ARCH/GARCH
technique has been employed in the analysis. The conditional volatility of inter day market
returns before and after the introduction of derivatives products are estimated with the (GARCH)
model. The Finding suggests that derivatives trading have reduced the volatility and have a
positive impact on the Kenyan economy.

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