Investor Behavior and Stock Price Volatility in the Nairobi Securities Exchange, Kenya

Stock markets are crucial for capital formation, economic stability, and long-term development, but their performance is often characterized by volatility influenced by both rational and behavioral factors. The behavioral finance perspective highlights that investor behavior is not always rational, challenging the assumptions of the efficient market hypothesis. In particular, investor sentiment and reactions to news have been found to significantly affect stock returns and volatility, sometimes more strongly than macroeconomic factors. Although behavioral finance literature shows that investor sentiment and biases can significantly influence stock prices, limited empirical evidence exists on how such behaviors manifest in African markets. Prior research on the Nairobi Securities Exchange (NSE) has examined financial metrics and firm growth dynamics, however, few studies have directly analyzed psychological factors. Therefore, the general objective of the study was to investigate the influence of investor behavior on stock price volatility in NSE. The specific objectives were to examine how; investor confidence, herding behavior, loss aversion, and speculative trading influence stock price volatility among listed companies. Theoretical frameworks underpinning this research include Confidence Theory, Herding Theory, Prospect Theory, and Speculative Trading Theory. The study adopted the descriptive correlational survey and targeted 412 institutional investors in the NSE from which the unit of analysis was institutional investors and retail investors. A sample size of 113 respondents was used and selected using stratified random sampling. Data was collected through questionnaires and data sheets. Both descriptive and inferential statistical methods were used to analyse the data which were presented in tables and discussed. The findings collectively indicate that behavioral factors are central drivers of stock price volatility in the NSE, with Investor Confidence and Speculative Trading exerting the strongest influence, followed by Herding Behavior and Loss Aversion. These results highlight the importance of integrating behavioral finance perspectives into market regulation, investor education, and trading strategies. Policies targeting confidence, herd-induced trading, and speculative practices could enhance market stability, while awareness of minor loss-averse tendencies may help investors make more rational portfolio decisions. The study makes the following recommendations based on the findings; Regulators and financial institutions associated with the Nairobi Securities Exchange should strengthen investor education programs focusing on behavioral biases and risk awareness. Regulators and market stakeholders associated with the Nairobi Securities Exchange should strengthen investor education programs that encourage independent analysis and critical evaluation of investment opportunities. Financial regulators and investment institutions associated with the Nairobi Securities Exchange should promote investor education programs that emphasize disciplined portfolio management and rational decision-making. Regulators and market authorities within the Nairobi Securities Exchange should strengthen oversight of speculative activities, particularly margin trading and short-term transactions.