The MARKET RISK PREMIA AND STOCK RETURNS OF COMMERCIAL BANKS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA

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Published Jun 15, 2026

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SAMUEL WASICHE
Msc Finance Student, School of Business and Entrepreneurship, Jomo Kenyatta University of Agriculture and Technology, Kenya
E. M. KIMANI, PhD
Lecturer, Jomo Kenyatta University of Agriculture and Technology, Kenya
DAVID KIMANI NDURUHU, PhD
CIA, Jomo Kenyatta University of Agriculture and Technology, Kenya

Abstract

Stock returns play a central role in capital allocation and investment decision-making by serving as a market-based indicator of the cost of equity capital for firms and investment projects. In an efficiently functioning stock market, return generation enables investors to assess risk accurately and translate it into expected compensation, thereby facilitating informed portfolio and financing decisions. However, in the Kenyan capital market, stock returns of commercial banks listed at the NSE have remained relatively volatile and, at times, subdued due to fluctuations in systematic market risk and changing macroeconomic conditions. These fluctuations have exposed investors to substantial valuation losses, especially during periods of foreign capital outflows, when international investors reallocate funds to perceived safer markets in developed economies. This study examined the effect of market risk premia on the stock returns of commercial banks listed at the NSE, Kenya. The study was supported by the capital asset pricing model (CAPM). The population of the study was drawn from the 11 commercial banks listed at the NSE in Kenya as of December 2025, and the study was conducted through a census approach. The study adopted a descriptive research design and utilized secondary panel data drawn from the NSE, CBK reports, and published financial statements of the listed commercial banks over ten years, from 2016 to 2025. Data was analyzed using a panel regression model, supported by descriptive statistics and diagnostic tests to ensure the validity and reliability of the estimated models. The findings revealed that the model had strong explanatory power with an R-squared of 0.6124, indicating that approximately 61.24% of the variation in stock returns is explained by the selected risk premia. The regression results showed that market risk premium (β = 0.4218, p < 0.01) was found to have a strong positive and significant effect on stock returns. The study concludes that market risk premia significantly influence stock returns of commercial banks listed at the NSE and that multi-factor asset pricing models provide a more comprehensive explanation of stock return behavior in the Kenyan context. The study recommends that investors are encouraged to adopt multi-factor investment strategies that consider market conditions, while bank management should focus on efficiency-driven growth to enhance shareholder value.

Article Details

Issue
Vol 7 No 1 (2026)
Section
Articles
Author Biographies

SAMUEL WASICHE, Msc Finance Student, School of Business and Entrepreneurship, Jomo Kenyatta University of Agriculture and Technology, Kenya

Msc Finance Student, School of Business and Entrepreneurship, Jomo Kenyatta University of Agriculture and Technology, Kenya

E. M. KIMANI, PhD, Lecturer, Jomo Kenyatta University of Agriculture and Technology, Kenya

Lecturer, Jomo Kenyatta University of Agriculture and Technology, Kenya

DAVID KIMANI NDURUHU, PhD, CIA, Jomo Kenyatta University of Agriculture and Technology, Kenya

CIA, Jomo Kenyatta University of Agriculture and Technology, Kenya

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