AN EMPIRICAL STUDY OF PRICE CLUSTERING ON THE NAIROBI SECURITIES EXCHANGE
DOI:
https://doi.org/10.47604/ijfa.295Keywords:
Price clustering, stock volatility, securities exchangeAbstract
Purpose: The purpose of this study was to empirically investigate price clustering phenomenon on the Nairobi Securities Exchange for the period 2009 to 2013.
Materials and methods: The study used secondary sources of data obtained from the Nairobi Securities exchange. The study revealed that there has been a preference by investors for stock whose prices end with the digit 5 and this accounted for 67.88 percent of all the stocks examined and was followed by stocks whose prices ended with the digit 0 which accounted for 4.55 percent. In order to establish the determinants of this observed behavior a multivariate regression model used by Harris (1991) was adopted where price clustering was regressed against stock volatility, number of trades, market capitalization, and own stock price.
Results: The regression results indicated that the number of trades as well as Market Capitalization was positive and significantly related to price clustering. The study also found the stock price to be negative and significantly related to price clustering. On the other hand, Stock volatility was established to be an insignificant predictor of price clustering. The multivariate regression model was found to be significant in explaining the observed relationship and that 15.4 percent of the variance in price clustering was explained by number of trades, stock volatility, own stock price and the market capitalization. The study finds that there is a tendency of prices to cluster around certain numbers as evidenced by the 67.88 percent of numbers clustering around the number 5 and that price clustering is positively related to number of trades
Recommendations: It is thus recommended that if firms are to increase the number of trades of their shares they should consider pricing their shares according to the preferences of investors who prefer shares or stocks whose prices ends with 5 or 0.
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