FINANCIAL DERIVATIVES AND MOBILE TRADING PLATFORMS’ EFFECTS ON STOCK MARKET VOLATILITY IN KENYA
Abstract
Purpose of the study: The overall objective of this study was to examine the effect of financial innovation on stock market volatility in Kenya.
Short introduction of problem statement: Although financial innovation has enhanced market access and diversification, it has also introduced new dynamics associated with speculative trading, rapid transactions, and changing investor behaviour, which may affect market stability. The increasing adoption of derivatives and mobile trading platforms at the NSE has coincided with more complex volatility patterns, raising concerns about whether these innovations stabilize the market through risk management or amplify instability through excessive risk-taking and herd behaviour. Despite this, there remains limited and inconclusive empirical evidence on their individual and combined effects on stock market volatility within the Kenyan context. Therefore, this study sought to address this gap by analysing the extent to which financial derivatives and mobile trading platforms influence stock market volatility, with the aim of providing evidence to inform policy, regulation, and risk management in Kenya’s capital markets.
Method/methodology: The study adopted a non-experimental time series design to analyze the relationship between financial innovations and stock market volatility at the NSE. The essence of the study was to examine the effects that derivatives trading and mobile platform adoption had on stock market volatility across the NSE sector. The approach was broader to allow analysis of volatility patterns in Kenya, thereby avoiding sectoral bias. A time series econometric approach was also employed to analyze market-wide volatility patterns through aggregate trading data, with a focus on volatility clustering effects in financial markets in Kenya. The study used secondary data on the values of the NSE 20 Share Index and the NSE 25 Share Index and the volume of derivatives traded from 2019 to 2024 from the Nairobi Securities Exchange while data on the number of trading accounts opened monthly and accounts that trade monthly for the same period was obtained from The Central Depository & Settlement Corporation Limited.
Results of the study: The study found that increased derivatives trading activity leads to greater price changes which occur because traders engage in both speculative and hedging practices. The research demonstrated that mobile trading platforms create a major impact on stock market fluctuations. The market participation of retail investors has increased because mobile trading provides them with easy access and convenient trading options which results in more trading activity and short-term price changes. The study found that derivatives trading and mobile trading together create a combined effect which results in greater market volatility. The study results showed that market volatility shows strong persistence because market shocks continue to affect the market for an extended time.
Conclusion and policy recommendation: The study concludes that financial innovations significantly impact stock market volatility in Kenya. The study recommends that financial innovation policies should match actual market behaviour to create a framework which enables innovation while controlling its impact on market fluctuations.
Keywords: Stock Market Volatility, Financial Innovation, Kenya
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