Market Risk Premia and Stock Returns at the Nairobi Securities Exchange 20 Share Index, Kenya
DOI:
https://doi.org/10.47604/ijfa.3821Keywords:
Market Risk Premia, Stock Returns, Nairobi Securities Exchange, Share Index, KenyaAbstract
Purpose: Stock returns form an essential element in capital allocation and investment decisions across the economy by providing an approximation of the cost of capital for a project, division, or firm. In a stock market where the return generation process is well established, investors are able to quantify risk and translate it into expected returns for the purpose of making the right investment choices. Returns at the Kenyan market is, however, generally depressed and experience high volatility arising from changes in overall market risk. Consequently, investors have often suffered heavy losses in terms of unrealized market valuation whenever foreign investors exit the market to seek other safer investment options with guaranteed returns in developed markets. This has consequently ignited a long-standing debate over the ability of the Kenyan securities market to correctly price securities and hence predict returns. The objective of the study was to study the effect of market risk premia on stock market returns at the NSE 20 Share Index, Kenya. The study anchored on the CAPM theory.
Methodology: The study adopted a descriptive research design to explain the effect of the relationship among the study variable. The study conducted a census study of all the firms listed on the NSE 20 Share Index, Kenya, as of December 2025. Secondary time series data was applied for a period of 7 years between 2019 and 2025. Secondary data were sourced from audited financial reports, CMA, and NSE databases. The data was analyzed using panel regression models to establish the relationship between market risk premia on stock returns at the NSE 20 Share Index, Kenya.
Findings: The findings revealed that market risk premium has a positive and statistically significant effect on stock returns (β = 0.4286, p < 0.01), indicating that systematic market risk is a key driver of returns. The model achieved a within R-squared of 0.6473, implying that approximately 64.73% of the variation in stock returns is explained by the market risk premia.
Unique Contribution to Theory, Practice and Policy: Based on these findings, the study recommended that regulatory bodies such as the CMA should strengthen market transparency to promote informed decision-making and improve market efficiency.
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