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Early Results on Depth of the Nascent Kenyan Derivative Market

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  • Faith Mwende Christopher
  • Amos Njuguna
  • Peter Kiriri

Abstract

Despite their importance in hedging against risk and reducing price uncertainty, derivative markets remain undeveloped or absent in many African countries. This paper describes market depth using key trends observed in the Kenyan derivatives market for the first 30 weeks of trading using mixed methods. Market depth was measured by the number of open interests of 142 trading days (30 weeks. The market was described using trend analysis, tests of means, and thematic analysis. The results revealed a market highly dominated by one company's single stock futures (Safaricom Plc), whose overall trade was 68% of the 6179 open contracts. Further, the market has strong weekly swings fluctuating from no trade to a high of 326 and a weekly average of 206 contracts. The market segment of single stock futures is significantly deeper than that of equity index futures. The qualitative study attributed the results to limited knowledge on derivatives amongst investors, unclear market policies, few derivatives products, and skepticism associated with developing financial markets. The Nairobi Securities Exchange (NSE) is advised to intensify investor education, introduce market makers, add new derivatives products, and transform the Nairobi Securities Exchange Clearing House into a full Central Counterparty (CCP) structure to accelerate market depth. This will create a pathway to market depth through efficiency and reduction of operational risks.

Suggested Citation

  • Faith Mwende Christopher & Amos Njuguna & Peter Kiriri, 2021. "Early Results on Depth of the Nascent Kenyan Derivative Market," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(3), pages 345-355, May.
    • Handle: RePEc:jfr:ijfr11:v:12:y:2021:i:3:p:345-355
    DOI: 10.5430/ijfr.v12n3p345
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    References listed on IDEAS

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    1. Jo Corkish & Allison Holland & Anne Fremault Vila, 1997. "The Determinants of Successful Financial Innovation: an Empirical Analysis of Futures Innovation on LIFFE," Bank of England working papers 70, Bank of England.
    2. Berkman, Henk & Eleswarapu, Venkat R., 1998. "Short-term traders and liquidity: a test using Bombay Stock Exchange data," Journal of Financial Economics, Elsevier, vol. 47(3), pages 339-355, March.
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